SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1997
Commission file number 0-27776
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GATEWAY DATA SCIENCES CORPORATION
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(Name of Small Business Issuer in Its Charter)
ARIZONA 86-0527788
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(State of incorporation) (I.R.S. Employer Identification No.)
3410 East University Drive, Suite 100
Phoenix, Arizona 85034 (602) 968-7000
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(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
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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: $27,156,148.
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
October 28, 1997 - $2,248,460. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors or 10% beneficial owners are, in fact, affiliates
of the registrant.
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of October 28, 1997 - 2,838,138 shares of
common stock, par value $.01 per share (the "Common Stock").
Documents incorporated by reference: None.
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GATEWAY DATA SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 16
ITEM 3. LEGAL PROCEEDINGS............................................. 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS............................... 17
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................. 18
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 26
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934.......................................... 28
ITEM 10. EXECUTIVE COMPENSATION........................................ 30
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 35
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 37
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.............................. 38
SIGNATURES ........................................................... 39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
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PART I
ITEM 1. BUSINESS
General
The Company designs, develops, markets, and implements software
products and provides related customer support services for retail applications
and warehouse automation. The Company utilizes its knowledge and understanding
of retail and warehouse operations as well as its extensive expertise in
specific software applications, systems, and networking to develop specific
product solutions that address the needs of its customers. The Company also
provides full-service product installation, customization, modification,
maintenance, and training in connection with sales of its software products. The
Company's application software products include modular systems developed by the
Company and, when necessary, product modifications that the Company
custom-engineers in order to meet the unique requirements of specific customers.
The Company designs each of its software products and enhancements to integrate
quickly and efficiently with each of its other software products as well as with
software developed by other vendors. The Company approaches each customer's
requirements from the customer's perspective, strives to gain a thorough
understanding of the customer's needs, and applies specific technologies,
including advanced software development tools, in order to craft an efficient
and cost-effective solution to the customer's needs.
Founded in 1985, the Company initially pursued a business plan of
integrating solutions for customers utilizing software and hardware products
developed by third parties, primarily International Business Machines Corp.
("IBM"). See Item 1, "Business -- Resale of Third-Party Products." The Company
believes that its 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 first began to change its business
strategy to emphasize the development and sale of its own software products.
Despite a lack of adequate capital prior to the completion of its initial public
offering in March 1996, the Company has changed its focus from selling products
developed by others to the development and sale of its own software products.
The Company has utilized a substantial portion of the proceeds of its initial
public offering to accelerate significantly its emphasis on the sale of its
recently developed software products and the development and sale of new
software products, including two open architecture, client/server-based software
systems introduced in early 1997.
Approximately 56% of the Company's revenue in the fiscal year ended
January 31, 1997 was derived from the resale of IBM hardware and software
products. The Company's reseller agreement with IBM expired in accordance with
its terms in July 1997. As a result, the Company anticipates that software
revenue will represent a significantly increased percentage of total revenue
beginning in fiscal 1998. See Item 6, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Strategy
Emphasis on Developing Innovative Products with Market-Leading Functionality
The Company continually strives to design and develop innovative
software products that deliver outstanding functions, effectively solve
difficult problems, and grow with the Company's customers. The Company intends
to continue its emphasis on market research and technological development in
order to determine the new products and features that will be in greatest demand
among its customers as well as to develop and market on a timely basis new
products and features that satisfy customer demand and that are superior to
comparably priced products offered by its competitors. In addition to developing
pre-packaged software solutions, the Company also maintains the capacity to
customize its software products to achieve full functionality and to maximize
system utility in order to meet the specialized business requirements of its
customers. The Company often refines these specialized features to develop new
add-on modules that make its base products more robust and appealing to new
customers.
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Combining Business Knowledge with Software Expertise
The Company focuses on specific business segments and applies its
knowledge of those segments with its extensive software expertise to create
specific commercial application software that addresses the complex business
requirements of its customers. In addition to their advanced software
development expertise, the Company's personnel possess extensive knowledge of
and experience in the retail and warehouse industries. The Company currently is
concentrating its resources on developing software products that improve and
integrate operational decision-making processes and make useful information
available throughout a business enterprise. The Company also places considerable
emphasis on ensuring that its software products integrate easily and effectively
with other software applications used by its customers. The Company believes
that, by consistently applying its knowledge of specific business segments to
the development of flexible, feature-rich commercial application software, it
will be able to capitalize on its expertise in retail and warehouse management
systems and participate in what it believes is a rapidly growing and potentially
large market.
Develop Software Products in Java(TM)
The Company believes that the Java(TM) programming language and
environment developed by Sun Microsystems, Inc. represents a fundamental change
in the software industry paradigm. Java(TM) offers a number of benefits to
customers of the Company's products, including platform independence, which
means that software written in Java(TM) allows the customer to chose from
virtually all major hardware platforms and all major computer operating systems;
reduction or elimination of complexities associated with distributing updated or
corrected versions of software throughout an enterprise; providing a single
standard for connecting software objects (the building blocks from which
software products are assembled) that spans all desktops and all servers that
support Java(TM); and support of both traditional PC client desktop platforms
and the new network computer client desktop platforms.
Focus on Customer Service
The Company seeks to provide outstanding customer service levels in
order to differentiate the Company from its competitors in the marketplace. The
Company provides a range of services to its customers, including implementation
and consulting services, software maintenance services, and help desk services.
The Company strives to exceed its customers' expectations in each of these
service areas. The Company supports this strategy by setting service level
objectives for managers, by providing training and recognition programs for
employees, and through its ongoing quality and customer satisfaction measurement
systems.
Software Products
The Company's primary software product lines currently consist of the
Transact(TM) Point-of-Sale System ("Transact"), the MarketBuilder(TM)
Relationship and Database Marketing System ("MarketBuilder"), the Gift Registry
System ("Gift Registry"), and Kinetics(TM) Warehouse Automation Software
("Kinetics"). License fees for Kinetics accounted for approximately 8% of the
Company's total revenue and virtually all of the Company's software license
revenue during fiscal 1997.
Transact Point-of-Sale System
In January 1997, the Company introduced the Transact Point-of-Sale
System for specialty and general merchandise retailers. Transact is the first
point-of-sale software product developed in Java(TM), which is a
platform-independent, object oriented programming environment that provides a
wide range of flexibility and value to end users. As a result of the high level
of marketplace interest in Transact, the Company has made Transact its primary
strategic focus and is devoting substantial resources to further development of
and refinements to Transact. As of October 28, 1997, the Company has achieved
limited sales of Transact and anticipates that Transact will be available for
general distribution in the third quarter of calendar 1997. There can be no
assurance, however, that the Company will be able to realize meaningful revenue
from sales of Transact in the future.
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Because it has been developed in Java(TM), Transact's open architecture
design enables the Company's customers to choose the optimal in-store hardware
and software combination for their needs, including systems developed by major
point-of-sale and computer manufacturers, and to take advantage of new hardware
and software technologies that may be developed in the future. Transact's object
oriented architecture enables the system to grow and adapt along with the users'
business. In addition, Transact features open database connectivity to a
relational database, which enables the user to quickly and easily store and
access point-of-sale information and to ensure data integrity.
Transact features a graphical, intuitive transaction set that
simplifies operation by cashiers, sales personnel, and store managers.
Transact's standard features currently include customer information capture;
price lookup with date-sensitive pricing; start-of-day and end-of-day procedures
with till count functions; function level and employee group security; training
mode; sales, returns, and exchanges; reporting functions; item- and
transaction-level discounts and tax adjustments; and item void, transaction
cancel, and post-sale void.
Transact integrates with the Company's "Credit Authorization" software
module, which provides base support for integrated dial-out credit
authorization. The module requires only one telephone line and modem for all
credit transactions performed at all of the registers in a store. The module
creates a data file of credit transactions for electronic settlement at the end
of the day. Transact also integrates with the Company's MarketBuilder System,
which is described below, and the Company's Sales Reporter, which is a graphical
inquiry and sales reporting query tool that store personnel can use to retrieve
register and cashier activity and sales information on sales persons.
MarketBuilder Relationship and Database Marketing System
In January 1997, the Company introduced the MarketBuilder Relationship
and Database Marketing System for use in the retail marketplace. MarketBuilder
enables retailers to capture, compile, and process a database containing
customer profile information in order to expand store traffic and profits by
encouraging customers to shop at the retailers' stores more frequently, by
persuading customers to spend more money on each visit, and by persuading
customers to purchase items with higher profit margins.
MarketBuilder assists retailers in (i) identifying their customers and
the type of transactions or purchases that individual customers make on a
regular basis; (ii) evaluating their customers based upon a variety of factors,
including geographic, demographic, and purchasing activity data; (iii)
interacting with those customers by a variety of means initiated by the
retailer, such as direct mail or telemarketing; and (iv) building customer
loyalty through special promotional incentives, such as "frequent buyer"
programs. MarketBuilder also allows retailers to compile and analyze data to
determine the promotional methods that most effectively stimulate sales.
MarketBuilder operates on a client/server configuration in conjunction
with a wide variety of servers and operating systems. In addition, MarketBuilder
interfaces with the Company's retail merchandising system in order to permit
broader data integration and increased flexibility and functionality. As of
October 28, 1997, the Company has achieved limited sales of MarketBuilder. There
can be no assurance, however, that the Company will be able to realize
meaningful revenue from sales of MarketBuilder in the future.
Gift Registry System
The Company's Gift Registry System is a sophisticated program that
actively tracks gift registrant information and gift preferences for weddings,
birthdays, anniversaries, and other occasions. Gift Registry features
menu-driven functions that enable the registrant to use either a PC terminal or
a hand-held portable data terminal to record gift preferences by scanning bar
code product labels on store merchandise and entering additional information,
such as quantities and color desired. The Company recently enhanced Gift
Registry with Microsoft Merchant Server(TM) technology to enable retailers to
develop a visually exciting online "storefront" to enable remote gift shopping
via the Internet. Out-of-town relatives and friends who otherwise would not have
access to a retailer's
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stores can use standard browser software to locate and select the registrant's
preferred gift items. Gift Registry enables online shoppers to include a
personalized note to be enclosed with the gift and to complete the transaction
with an approved credit card payment.
Gift Registry provides an application program interface that enables
the retailer's point-of-sale system to automatically update information about
purchases and returns of the registrant's preference items in order to reduce
duplicate gift purchases and to optimize inventory quantities. Gift Registry
supports a unique rebate program that accumulates a predefined percentage of
total gift purchases and rewards the registrant with a gift certificate. Gift
Registry also enables store or corporate management to produce standard and
custom-designed comprehensive reports on gift registry performance based on
criteria, such as type of registry, specific merchandise preferences, value of
items requested, and names of in-store consultants. Gift Registry operates on
the Microsoft WindowsNT(TM) server platform.
Kinetics Warehouse Automation Software
The Company's Kinetics Warehouse Automation Software (formerly called
"Warehouse Control System/400") enables warehouse operators to prioritize,
direct, verify, and measure all of the operations that occur within a retail,
wholesale distribution, or manufacturing warehouse facility. Kinetics utilizes a
dynamic prioritized task management logic structure that facilitates rapid
movement of goods throughout a warehouse, increases the efficiency of warehouse
employees, and improves warehouse space utilization. Kinetics supports all
functions within the warehouse and typically interfaces with an external host
computer in order to transmit receiving, shipping, and inventory information.
Kinetics operates on the IBM AS/400 family of computers and utilizes the OS/400
operating system and DB2/400 integrated relational database.
Kinetics provides the capability to reduce operating and
administrative costs by (i) decreasing labor costs and improving employee
productivity; (ii) improving merchandise flow; (iii) reducing clerical costs;
(iv) automating manual operations, such as cycle counting; (v) improving space
utilization in the warehouse and in outbound vehicles; and (vi) reducing
inventory losses and excess inventory. Kinetics also enables warehouse
operations to improve customer service by increasing order accuracy rates and
prioritizing and promptly filling customer orders.
Kinetics consists of modules that regulate the daily flow of
merchandise into, out of, and within the warehouse; perform inventory functions,
such as cycle counting and physical inventory adjustment procedures; and provide
administrative and management activities, such as downloading information from
and uploading information to the business's host computer system, performing
database administration and file maintenance tasks, and printing system reports.
The Company or the customer can configure Kinetics to support multiple
distribution centers by setting enterprise and warehouse parameters that model
each unique operating environment and to provide full support for wireless
communications networks, barcode labeling, scanning, and integration with most
material handling systems. The Company consults with each customer to design and
implement modifications to the Kinetics base system in order to tailor Kinetics
to the customer's specific needs.
In July 1997, the Company entered into an arrangement with Info
Systems of North Carolina, Inc. ("ISI") with respect to future sales of Kinetics
and related products and services (the "Covered Products") to certain of the
Company's customers (the "Designated Customers"). Under this arrangement, the
Company has ceased selling the Covered Products to the Designated Customers, and
the Company and ISI have entered into a reseller agreement pursuant to which ISI
will have the right to resell the Covered Products to the Designated Customers.
The arrangement requires ISI to pay to the Company 50% of ISI's operating
profits (as defined) from sales of the Covered Products during the four-year
term of the arrangement. The Company has the right to terminate the arrangement
and resume selling the Covered Products to the Designated Customers in the event
that ISI's payments to the Company are less than $50,000 in each of two
consecutive quarterly periods. In addition, ISI has the right to terminate the
arrangement upon written notice to the Company, provided that ISI ceases selling
the Covered Products to the Designated Customers for a period of two years after
such termination. As of the date of this
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Report, this arrangement has not provided the Company with any meaningful
revenue, and there can be no assurance that the Company will derive significant
revenue from this arrangement in the future.
Resale of Third-Party Products
In conjunction with and in addition to the sale of its own software
products, the Company resells, installs, and supports a variety of hardware and
software products developed by third parties, including computer systems,
wireless terminal networks, bar code printers and scanners, and point-of-sale
and other software. The Company resells all third-party products pursuant to
agreements with the products' manufacturers. These agreements generally permit
the Company to sell the third-parties' products to any unaffiliated end user of
the Company's and other manufacturers' software products within the United
States. Sales of third-party products accounted for approximately 82% and 75% of
the Company's total revenue for the fiscal years ended January 31, 1996 and
1997, respectively. Sales of IBM hardware and software represented approximately
66% and 56% of the Company's total revenue for the fiscal years ended January
31, 1996 and 1997, respectively. The Company's reseller agreement with IBM
expired in accordance with its terms in July 1997. As a result, the Company
anticipates that sales of third-party products will decrease significantly as a
percentage of revenue beginning in fiscal 1998. See Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Customers
The Company has designed Transact, MarketBuilder, and Gift Registry
for specialty retailers. The Company has designed Kinetics for sale to
retailers, distributors, and manufacturers with warehouse operations involving
at least 250,000 square feet of space and at least 40 employees. In addition to
Kinetics, the Company has designed and installed custom warehouse automation
software at several major distribution sites in the United States. The following
sets forth representative customers for Transact, MarketBuilder, Kinetics, and
other warehouse automation software.
<TABLE>
<CAPTION>
Customer Description Product
-------- ----------- -------
<S> <C> <C>
The Walking Company.................. Specialty retailer Transact
Samsonite............................ Specialty retailer Transact
Burlington Coat Factory.............. Specialty retailer MarketBuilder
Baskin Robbins....................... Food manufacturer, Kinetics in five warehouses
distributor, and retailer
SuperAmerica......................... Convenience store chain Kinetics in two warehouses
Brookstone........................... Specialty retailer Kinetics in one warehouse
TJX Co. (T.J. Maxx stores)........... Discount fashion retailer Custom warehouse automation software
in four warehouses
CSK Automotive Corp.................. Auto parts retailer Custom warehouse automation software
in three warehouses
Consolidated
Communications Inc................. Telecommunications Warehouse and materials management
company software
</TABLE>
Sales to Consolidated Communications, Inc. ("CCI") and Factory Card
Outlet, Inc. accounted for approximately 31% and 21%, respectively, of the
Company's total revenue in the year ended January 31, 1997. Sales to CCI and TJX
Co. accounted for approximately 18% and 12%, respectively, of the Company's
total revenue in the year ended January 31, 1996. 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 upon the placement of significant orders by a particular customer or
customers in any given year.
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Customer Services and Support
The Company has established high-quality systems installation and
after-sale customer support as critical customer service priorities. The Company
assigns an account manager to each customer immediately after the execution of a
license agreement. The account manager works closely with the customer to ensure
that the optimal system solution is designed and properly integrated into the
customer's business organization. The Company provides implementation services
teams consisting of business consultants and software developers who conduct
project management, implementation consulting, and training at the customer's
site. Following installation and implementation, the account manager continues
to work closely with the customer to ensure that the system has been properly
integrated into the customer's business, to offer consulting services designed
to enable the customer to fully utilize the system, to work in conjunction with
the customer to develop enhancements or specialized features that address the
customer's needs, and to suggest system modifications or upgrades that would
further benefit the customer. The Company also provides a variety of training
services designed to enable its customers to utilize fully the Company's
software applications. The Company's specialists conduct training sessions
ranging from introductory courses to advanced techniques courses in using the
Company's products.
The Company provides maintenance and support services under its
license agreements without charge for 90 days following installation and
renewable, annual maintenance contracts thereafter. Annual maintenance fees
generally equal 15% of the then-current list price of the products under license
by the customer. A staff of qualified customer support specialists provides
toll-free telephone technical support and advice. The Company also provides
error corrections and any product enhancements that it releases during the
maintenance period.
New Product Development
The Company recognizes that timely development of new software products
as well as enhancements to its existing software applications, each with
functions and features that distinguish the Company's products from those of its
competitors, represents a critical factor in determining the Company's ongoing
success. The Company's engineering staff consists of highly trained and
experienced software professionals who focus on providing and supporting
high-quality, user-friendly software systems and related products and services.
The availability of in-house software and systems development expertise at the
Company's facility in Phoenix, Arizona provides the Company with product
control, permits faster turnaround and reaction time to changing market
conditions, and provides a solid base of maintenance and support services to end
users. Product development teams work in cooperation with the Company's sales,
marketing, support, and customer service personnel to assess market demand, to
establish product development priorities, and to evaluate the effectiveness of
new product solutions. The Company also collaborates with selected customers to
develop new software solutions that the Company believes will address specific
demands of the marketplace. In addition, the Company has established channels
for customer feedback and continually evaluates responses to determine customer
satisfaction with existing products and demand for enhancements to existing
products or for new software applications. The Company currently is
concentrating the majority of its product development resources towards further
development of and refinements to Transact and to developing other
Java(TM)-based software products.
The Company's product development staff consisted of 34 employees as
of October 28, 1997. The Company's product development expenses consist of
internal product development costs, expenses for customer-funded projects, and
fees paid for external product development. The Company's total product
development expenses were approximately $2.1 million, $2.9 million, and $3.7
million in the fiscal years ended January 31, 1995, 1996, and 1997,
respectively. The Company historically has expensed all of its software
development costs. See Item 6, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company intends to continue
to increase its internal product development efforts as part of its strategy to
provide comprehensive software solutions to its customers.
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Sales and Marketing
The Company markets software products and related customer support
services and hardware primarily to retailers and to warehouse and distribution
center operators in the continental United States through a direct sales force.
The Company's marketing managers work in conjunction with the Company's product
development staff to develop product specifications and requirements, assess the
competitive strengths of the Company's products, determine strategic marketing
focus, and provide strategic marketing support. The Company's account executives
develop leads through ongoing customer communications, trade shows and industry
conventions, requests for proposals ("RFPs"), requests for information ("RFIs"),
and referrals from existing customers or sales representatives of hardware
vendors. One or more product specialists support each account executive. The
product specialists provide presale marketing support consisting of trade show
support, product demonstrations, and support in preparing sales proposals or
responses to RFPs and RFIs. The Company also employs marketing representatives
who conduct marketing efforts designed to sell add-on enhancement products to
existing customers. The Company has established strategic alliances in the form
of lead referral and informal co-marketing arrangements with vendors of the
hardware that the Company installs in conjunction with sales of its software
applications. During fiscal 1997, the Company used a portion of the proceeds of
its initial public offering to hire additional sales and marketing personnel, to
develop and implement new advertising campaigns, and to develop and produce
collateral marketing materials such as sales brochures. See Item 6,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
License Agreements
In recent years, the Company has changed its business strategy to
emphasize the development of its own software products. The Company generally
grants nonexclusive, nontransferable perpetual licenses that limit the use of
its software products to a designated user, site, or central processing unit
("CPU"). The Company charges license fees that vary depending upon (i) the type
of software products subject to the license; (ii) whether the product will be
installed on a client/server environment or midrange platform; (iii) the number
of users (in the case of client/server installations) or the CPU processing
power (in the case of midrange installations); and (iv) the number and type of
modules purchased. Each license agreement includes an initial 90-day period of
maintenance and support services without additional charge. The customer may
purchase from the Company renewable annual contracts for maintenance and support
services for a fee of approximately 15% of the then-current list price of the
product under license to the customer. The Company also charges a standard "time
and materials" rate for software programming services required to write custom
modifications to Transact, MarketBuilder, Gift Registry, or Kinetics in order to
tailor the systems to a particular customer's business operations.
Competition
The market for software products such as the Company's is intensely
competitive and is characterized by rapid changes in technology and user needs
and the frequent introduction of new products and product enhancements. The
Company's competitors and potential market entrants range from small, privately
held firms to large national and international organizations with more extensive
technical staffs and technological resources, larger marketing and sales
organizations, and greater financial resources than the Company. The Company
also competes with software applications developed by the internal management
information system departments of its potential customers. The Company, however,
believes that potential customers increasingly will purchase software
applications from outside vendors, including the Company, as such products
become more widely available and the cost savings of such products become better
demonstrated.
The Company competes primarily on the basis of the flexibility, ease
of use, application features, customization capabilities, platform
configurations, and prices of its software products; its knowledge and
experience in retail and warehouse management systems; the depth of its
technical skills, its responsiveness to customer needs, and its ability to
achieve desired results; and the quality of its technical support services. The
Company believes that it competes favorably with respect to these factors. The
Company's ability to compete successfully will depend
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upon its ability to respond promptly and effectively to customer demands,
technological changes, and competitive innovations, to develop new products and
services, to attract new customers and to deliver and support product
enhancements to existing customers, and to attract and retain qualified
technical sales personnel. The Company's Kinetics software currently operates
only on the IBM AS/400 midrange platform and competes with products that operate
on client/server environments such as Unix or WindowsNT.
Proprietary Rights and Licenses
The Company considers its software to be proprietary and attempts to
protect it with a combination of copyright, trademark, and trade secret laws,
nondisclosure and other contractual agreements with employees and third parties,
and technical measures designed to protect its proprietary technology. Despite
these precautions, there can be no assurance that the steps taken by the Company
will be adequate to prevent misappropriation of its proprietary rights or that
third parties will not independently develop equivalent or superior technology.
However, the Company believes that, as a result of the rapid pace of
technological change in the software industry, trademark and copyright
protections are less significant to the Company's success than other factors,
such as the knowledge and experience of the Company's personnel, name
recognition, and ongoing product development and support.
The Company generally grants nonexclusive, nontransferable perpetual
licenses that limit the use of its software products to a designated user, site,
or computer. In certain circumstances, the Company makes source code available
for specific products and/or enters into source code escrow agreements. The
providing of source code may increase the likelihood of misappropriation or
other misuse of the Company's intellectual property.
The software industry is characterized by rapid technological
development and frequent introductions of new products and features. In order to
remain competitive, the Company and other software developers continually find
it necessary to develop products and features that provide functions similar or
superior to those of other industry participants, often with incomplete
knowledge of whether patent or copyright protection may have been applied for or
obtained by other parties. Although the Company believes that its products and
technology do not infringe upon the proprietary rights of others, there can be
no assurance that third parties will not assert infringement claims against the
Company in the future. The defense of such claims, fees paid in settlement of
such claims, or costs associated with licensing rights to use the intellectual
property of others or to develop alternative technology may have a material
adverse effect on the Company's operations. See Item 1, "Special Considerations
- - Dependence Upon Proprietary Technology; Intellectual Property Claims."
Employees
As of October 28, 1997, the Company employed a total of 90 full-time
employees and one part-time employee at its offices in Phoenix, Arizona. This
includes 34 persons in software engineering and product development, 45 in
sales, marketing, and technical support, and 12 in administration, including
executive personnel. The Company considers its relationship with its employees
to be good, and none of its employees currently are represented by a union in
collective bargaining with the Company.
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SPECIAL CONSIDERATIONS
The following factors, in addition to those discussed elsewhere in
this Report, should be carefully considered in evaluating the Company and its
business.
Disclaimer of Audit Opinion
The Company's financial statements for the year ended January 31, 1997
were prepared assuming that the Company will continue as a going concern. Those
financial statements report that the Company (i) had negative cash flow from
operations of $2,612,680 during the year ended January 31, 1997, (ii) is in
default of certain terms of its line of credit agreement, (iii) does not have
readily available financing, (iv) is engaged in material litigation with a
significant customer, (v) recorded a net loss of approximately $702,000 during
the six months ended July 31, 1997, and (vi) has not yet generated sufficient
revenue from sales of its software products to fund its ongoing operations. In
addition, the Company's reseller agreement with IBM expired in July 1997. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. As a result of the factors described above, the Company's
auditors have reported to the Company that they are unable to express, and do
not express, an opinion on the Company's financial statements for the year ended
January 31, 1997. The Company currently is taking steps intended to address the
factors described above, including seeking additional sources of debt or equity
financing. There can be no assurance, however, that additional financing will be
available to the Company on terms that are acceptable to the Company. See Item
1, "Special Considerations - Capital Requirements" and Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Certain Factors Affecting Operating Results
The Company's operating results are affected by a wide variety of
factors that could adversely impact its total revenue and profitability. These
factors, many of which are beyond the control of the Company, include the
Company's ability to identify market segments that have significant growth
potential and to successfully market its products and services to those market
segments; 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 success in maintaining
customer satisfaction with its products; the Company's ability to establish and
maintain strong and long-lasting relationships with the independent hardware and
software vendors that supply the various components that support its products;
the level and timing of orders placed by customers that the Company can complete
in a quarter; customer order patterns and seasonality; the length of the
Company's sales cycle; delays and other risks associated with customers'
budgetary constraints, internal authorization reviews, and program specification
development and acceptance procedures generally associated with large capital
expenditures; unanticipated postponement or cancellation of significant orders;
changes in product mix, professional services, and the level of expenses related
thereto; the performance and reliability of the software applications designed
and marketed by the Company; the life cycles of the Company's products; the
ability of the Company to deliver, install, and integrate its software
applications and product components in an efficient, timely, and high-quality
manner; the availability and cost of computer hardware, equipment, and supplies
required to support the Company's software applications; the timing of
expenditures in anticipation of orders; the cyclical nature of the businesses,
industries, and markets served by the Company; technological changes; the
introduction of new products by competitors; and competition and competitive
pressures on prices which, among other things, may decrease gross margins.
The Company's ability to increase its software development and systems
integration capacity in order to meet customer demand and maintain satisfactory
installation and integration schedules will be an important factor in its
long-term prospects. The business segments that certain of the Company's
products serve suffer periodic slowdowns as a result of general economic and
other conditions. A slowdown in demand for the Company's products as a result of
economic or other conditions in markets served by the Company or other
broad-based factors would adversely affect the operating results of the Company.
The Company will be required to obtain additional capital to fund its planned
growth in the future, particularly to provide funds required to finance the
Company's
9
<PAGE>
planned software development programs and increased sales and marketing efforts
or to finance acquisition opportunities that may arise in the future, although
the Company currently has no acquisition targets. 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 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.
Change in Product Mix
Historically, the Company has derived a substantial portion of its
revenue from the sale of hardware and software developed by others. The Company
has changed its business strategy to emphasize the development of its own
software products in an effort to increase the relative percentage of revenue it
derives from sales of such products. The Company has successfully introduced
Kinetics, a proprietary warehouse management software product, and has achieved
a meaningful level of revenue with this product. In addition, the Company
recently has introduced Transact, a Java(TM)-based point-of-sale system, and
MarketBuilder, a relationship and database marketing system. Sales of these
products have not been significant to date, however, and there can be no
assurance that either product will achieve market acceptance in the future. The
Company also intends to continue to develop and market new software products and
services to address customer needs and changes in computing technology and
methodology. There can be no assurance, however, that the Company will be able
to successfully complete the transition of its business focus, that the
Company's internally developed products will achieve increased market
acceptance, that the Company will be able to develop new products and services
in a timely and cost-effective manner, or that such products that are developed
will be accepted in the marketplace. See Item 1, "Special Considerations --
Dependence on New Products and Technologies" and "Special Considerations --
Dependence on Midrange Computer Technology." The failure of the Company to
successfully complete the change in its business focus, to develop and market
its own software products, and to overcome the loss of revenue from the sale of
hardware and software products developed by others could have a material adverse
effect on the Company.
Dependence on New Products and Technologies
The Company operates in an industry that is characterized by
fast-changing technology. As a result, the Company will be required to expend
substantial funds for and commit significant resources to the conduct of
continuing product development, including research and development activities
and the engagement of additional engineering and other technical personnel. Any
failure by the Company to anticipate or respond adequately to technological
developments, customer requirements, or new design and production techniques, or
any significant delays in product development or introduction, could have a
material adverse effect on the operating results of the Company.
The Company's future operating results will depend to a significant
extent on its ability to identify, develop, and market enhancements or
improvements to existing software applications as well as to introduce new
product lines that compare favorably on the basis of time to introduction, cost,
and performance with the product lines offered by competitors. The success of
new product lines depends on various factors, including proper market segment
selection, utilization of advances in technology, innovative development of new
product concepts, timely completion and delivery, efficient and cost-effective
features, and market acceptance. The success of the Company's new product lines
also will depend to a significant extent on marketplace acceptance of the
Java(TM) programming language and software environment, which is not yet
assured. Because of the complexity of the design and implementation processes
required by the Company's products, the Company may experience delays from time
to time in completing the design and implementation of improvements to existing
product lines or the introduction of new product lines. In addition, there can
be no assurance that any new product lines will receive or maintain customer or
market acceptance. The Company's future operating results would be adversely
affected in the event that it is unable to design and implement enhancements to
existing product lines or introduce new products on a timely and cost-effective
basis. See Item 1, "Business -- Software Products."
10
<PAGE>
Complex software programs, such as those developed by the Company and
incorporated into its products, often encounter development delays and
occasionally contain errors that are discovered only after the product has been
installed and used by many different customers in a variety of business
operations. Significant development delays in the future may result in increased
product development costs, delays in market acceptance, loss of sales, and
reduction of market share, which could have a material adverse effect on the
Company's operating results. Although the Company conducts extensive testing of
the software programs included in its products, there can be no assurance that
the Company will successfully detect and eliminate all programming errors in its
products prior to shipment. Significant programming errors in software
applications could require substantial design modifications that may create
delays in product introduction and shipment and that could result in an adverse
impact on the Company's goodwill as well as on its operating results.
Management of Change in Business
The Company currently is experiencing a period of significant growth
in the development and sale of its software products. The Company's ability to
manage effectively this change in its business operations will require it to
enhance its operational, financial, and management systems; to expand its
facilities and equipment; and to successfully hire, train, and motivate
additional employees, including the technical personnel necessary to develop the
Company's software applications and to integrate new software systems with
evolving hardware technologies. The failure of the Company to manage effectively
the change in its business focus could have a material adverse effect on the
Company.
Dependence on IBM Midrange Computer Technology
The Company's Kinetics software product currently operates solely on
IBM AS/400 midrange computers utilizing IBM's OS/400 operating system. To date,
the Company has derived substantially all of its software revenue from this
AS/400 application. In recent years, however, business organizations have begun
utilizing alternative computing platforms, such as client/server networks, local
area networks, work stations, and PCs, to operate large portions of their
computer processing functions. Future revenue from sales of the Kinetics product
and related services will depend upon continued widespread use of IBM midrange
computers and related operating system software and upon continued support of
such computers by IBM. In addition, the Company will be required to adapt its
existing Kinetics product to any changes made by IBM to the OS/400 operating
system in the interim. A significant shift away from IBM midrange computer
systems by the Company's customers or the failure by IBM to continue its support
of such computer systems could have a material adverse effect on the Company.
See Item 1, "Special Considerations -- Dependence on New Products and
Technologies."
Fluctuations in Operating Results
The software industry has experienced economic downturns at various
times, characterized by diminished product demand and increased availability of
alternative software solutions. The Company has sought to reduce its exposure to
industry downturns by targeting its product lines towards specific niches within
the retail merchandising and logistics industries, which the Company believes
will sustain continued growth in the near and long term, resulting in steadily
increasing demand for newly developed and enhanced software applications.
However, these industries are subject to intense competitive pressures and
suffer periodic slowdowns as a result of general economic conditions and other
broadbased factors. The retail industry in particular has suffered disappointing
overall results and increased consolidation in recent years. In addition, the
Company's customers may postpone or abandon planned purchases of the Company's
software products during periods of economic downturns as a result of the
significant capital expenditures for new computer hardware frequently required
to operate the Company's software. As a result, the Company may experience
substantial period-to-period fluctuations in future operating results because of
general industry conditions or events occurring in the general economy. In
addition, although the Company has experienced some quarterly sales fluctuations
in the past, the size and timing of sales of its new software applications may
be expected to vary from quarter to quarter to a greater extent. The expanding
importance of these new products could result in significant variations in the
Company's overall operating results on a quarterly basis.
11
<PAGE>
Quarterly revenue and operating results depend primarily on the volume
and timing of orders received during the quarter, which are difficult to
forecast. The Company often recognizes a substantial portion of its revenue in
the last month of each quarter. The Company believes that these sales patterns
are attributable to the budgeting and purchasing practices of its customers, the
length of time that customers devote to evaluation of the Company's products,
and the customers' timing of computer and operational systems installations and
upgrades. The Company establishes personnel levels and other fixed expenses
based upon anticipated revenue. Because a substantial portion of the Company's
revenue may not materialize to the extent or in the time frame anticipated, the
Company may not be able to reduce expenses in response to sales shortfalls or
delays. These factors may cause significant variations in quarterly operating
results in the future.
Capital Requirements
To remain competitive, the Company must continue to make significant
investments in product development, equipment, and facilities as well as in its
ongoing sales and marketing programs. The Company also may be required to
increase staffing and other expenses in order to meet the demand for its
products and services. Customers, however, generally do not commit to firm
purchase orders for more than a short time in advance. As a result of the
increase in fixed costs and operating expenses related to these expenditures,
the Company's operating results may be adversely affected if its revenue does
not increase sufficiently to offset the increased costs. The development of new
products or product enhancements or unexpected customer orders also may require
rapid increases in design and production services that place excessive
short-term burdens on the Company's resources. The Company from time to time may
seek additional equity or debt financing to provide for the expenditures
required to maintain or expand the Company's product development, facilities,
and equipment or its sales and marketing efforts. The timing and amount of any
such capital requirements cannot be predicted at this time.
Subsequent to January 31, 1997, the Company obtained a new line of
credit from Norwest Business Credit, Inc. ("Norwest"). See Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." As of October 28, 1997, the Company was in
default under certain covenants in this line of credit. As a result, Norwest has
the right to demand payment of all amounts outstanding under the line of credit.
In addition, in October 1997 Norwest exercised its right to not provide any
further advances under the line of credit. The Company currently is seeking
additional sources of financing, which may include one or more private
placements of debt or equity securities. There can be no assurance that any
additional financing will be available to the Company or as to the terms of any
such financing that is available. The inability to obtain such financing could
result in the inability of the Company to continue as a going concern. If such
financing is not available in sufficient amounts or on satisfactory terms, the
Company also may be unable to expand its business or develop new customers at
the rate desired and its operating results may be adversely affected.
Weaknesses in Internal Controls
The Company's independent public accountants have reported to the
Company that, in the course of their audit of the Company's financial statements
for the fiscal year ended January 31, 1997 and their review of the unaudited
financial statements for the six months ended July 31, 1997, they discovered
various conditions that they believe constitute material weaknesses in the
Company's internal controls. These conditions consist of (i) weaknesses in
forecasting internal cash requirements; (ii) weaknesses in policies and
procedures to ensure the accurate timing, classification, and recording of
significant transactions; and (iii) weaknesses in maintaining formal
documentation regarding acquisitions and dispositions of assets. The Company has
been taking various steps intended to strengthen its internal controls,
including engaging more experienced personnel in both operational and financial
positions and working more closely with its independent public accountants to
identify weaknesses and take corrective measures. The Company also has requested
its independent public accountants to perform quarterly reviews of its financial
statements.
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<PAGE>
Competition
The markets for the Company's software applications are intensely
competitive and have been characterized by rapid technological change, evolving
industry standards, constant changes in customer needs, and the frequent
introduction of new products. The Company competes with small, privately held
companies as well as with major domestic and international companies, many of
which have greater market recognition and substantially greater financial,
technical, marketing, distribution, and other resources than the Company
possesses. The ability of the Company to compete successfully depends on a
number of factors both within and outside its control, including the quality,
performance, reliability, features, ease of use, pricing, and diversity of its
product lines; the quality of its customer services; its ability to address the
needs of its customers; its success in designing and implementing new software
applications, including those incorporating new technologies; the availability
of adequate sources of computer hardware, finished components, and other
supplies necessary to support the Company's software applications at acceptable
prices; the rate at which end users install, upgrade, or expand new or existing
computerized retail and logistics systems; new product introductions by the
Company's competitors; the number, nature, and success of its competitors in a
given market; the emergence of new competitors or alliances among existing
competitors; and general market and economic conditions. The Company currently
competes principally on the basis of the technical innovation and performance of
its software applications, including their ease of use, reliability, cost,
timely introduction, delivery schedules, and after-sale service and technical
support. There is no assurance that the Company will continue to be able to
compete successfully in the future. See Item 1, "Business -- Competition."
Dependence on Management and Other Key Personnel
The Company's development and operations to date have been, and its
proposed operations will be, substantially dependent upon the efforts and
abilities of its senior management and technical personnel. The software
industry is characterized by a high level of employee mobility and aggressive
recruiting of skilled technical personnel. The Company does not have employment
agreements with any of its executive officers. The Company, however, maintains
agreements with each of its officers and employees that prohibit such persons
from disclosing confidential information obtained while employed with the
Company. The loss of existing key personnel or the failure to recruit and retain
necessary additional personnel would adversely affect the Company's business
prospects. There can be no assurance that the Company will be able to retain its
current personnel or to attract and retain necessary additional personnel. The
Company's internal growth and the expansion of its product lines will require
additional expertise in such areas as software development, operational
management, and marketing. Such growth and expansion activities will increase
further the demand on the Company's resources and require the addition of new
personnel and the development of additional expertise by existing personnel. The
failure of the Company to attract and retain personnel with the requisite
expertise or to develop internally such expertise could adversely affect the
prospects for the Company's success. The Company maintains "key person"
insurance covering Michael M. Gordon, its Chairman of the Board and President.
Dependence Upon Proprietary Technology; Intellectual Property Claims
The Company's success depends in part upon its ability to protect its
proprietary technology. The Company relies on a combination of copyright,
trademark, and trade secret laws, nondisclosure and other contractual agreements
with employees and third parties, and technical measures to protect its
proprietary technology. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to protect
misappropriation of such rights or that third parties will not independently
develop equivalent or superior technology. The Company has no patents, and
existing trade secret and copyrights laws provide only limited protection.
Certain provisions of the license agreements generally used by the Company,
including provisions protecting against unauthorized use, copying, transfer, and
disclosure, may be unenforceable under the laws of certain jurisdictions. The
Company may be subject to or may initiate interference proceedings in the United
States Patent and Trademark Office, which can demand significant financial and
management resources. Although the Company believes that its products and
technology do not infringe upon the proprietary rights of others, there
13
<PAGE>
can be no assurance that third parties will not assert infringement claims
against the Company in the future. Based on industry practice, the Company
believes that in most cases it could obtain any necessary licenses or other
rights on commercially reasonable terms. There can be no assurance, however,
that licenses would be available on acceptable terms, that litigation would not
ensue, or that damages for any past infringements would not be assessed.
Litigation, which could result in substantial cost to and diversion of effort by
the Company, may be necessary to enforce intellectual property rights of the
Company or to defend the Company against claimed infringement of the rights of
others. The failure to obtain necessary licenses or other rights or litigation
arising out of infringement claims could have a material adverse effect on the
Company. See Item 1, "Business -- Proprietary Rights and Licenses."
Warranty Claims
The Company's agreements with its customers generally include
warranties that provide that, for a period of 90 days after shipment, the
Company's software products will conform to and operate in accordance with
documentation provided to the customer by the Company. The terms of such
warranties require the Company to correct any defects identified by the customer
during the warranty period and to refund the purchase price for any defective
software that the Company is unable to correct within a reasonable period of
time. The Company generally assigns to its customers any warranties provided by
third-party manufacturers of hardware and software products that the Company
resells and warrants that the computer hardware that it resells will operate and
perform as warranted by the manufacturer for the period specified in the
manufacturer's warranty. The Company's agreements with its customers include
provisions intended to limit the Company's liability under its product
warranties. Such provisions may be held to be invalid or ineffective under
applicable laws in the event that a customer makes a claim against the Company
pursuant to a warranty on any of its software products. Although the Company has
not experienced any material warranty claims on its software products to date,
there can be no assurance that the Company will not be subjected to significant
warranty claims on one or more of its software products in the future. A
successful warranty claim or series of claims, if sufficiently large, could have
a material adverse effect on the Company.
Control by Current Shareholders
The Company's directors and officers and affiliates of certain of the
Company's directors currently own approximately 36.6% of the outstanding shares
of Common Stock. Consequently, such shareholders voting together will continue
to have the power to elect all of the Company's directors and to effectively
control the Company.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock in the public
securities market could be subject to wide fluctuations in response to quarterly
variations in operating results of the Company or its competitors, actual or
anticipated announcements of technological innovations or new product
developments by the Company or its competitors, changes in analysts' estimates
of the Company's financial performance, developments or disputes concerning
proprietary rights, regulatory developments, general industry conditions,
worldwide economic and financial conditions, and other events and factors.
During certain periods, the stock markets have experienced extreme price and
volume fluctuations. In particular, prices for many technology stocks often
fluctuate widely, frequently for reasons unrelated to the operating performance
of such companies. These broad market fluctuations and other factors may
adversely affect the market price of the Company's Common Stock.
Rights to Acquire Shares
A total of 1,306,665 shares of Common Stock has been reserved for
issuance upon exercise of options granted or which may be granted under the
Company's 1990 Stock Option Plan (the "1990 Plan"), 1995 Stock Option Plan (the
"1995 Plan"), and Employee Stock Purchase Plan (the "Purchase Plan"). Options to
acquire 871,525 shares of Common Stock at a weighted average exercise price of
$6.10 per share were outstanding under
14
<PAGE>
the 1990 Plan and 1995 Plan as of October 28, 1997. In addition, warrants to
purchase 516,044 shares of Common Stock at a weighted average exercise price of
$6.29 per share were outstanding as of October 28, 1997. During the terms of
such options, warrants, and purchase rights pursuant to the Purchase Plan, the
holders thereof will have the opportunity to profit from an increase in the
market price of the Common Stock. The existence of such stock options, warrants,
and purchase rights may adversely affect the terms on which the Company can
obtain additional financing, and the holders of such options, warrants, and
purchase rights can be expected to exercise such options, warrants and purchase
rights at a time when the Company, in all likelihood, would be able to obtain
additional capital by offering shares of its Common Stock on terms more
favorable to the Company than those provided by the exercise of such options,
warrants, and purchase rights.
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. Of the 2,838,138 shares of
Common Stock currently outstanding, approximately 1,785,000 shares are eligible
for resale in the public market without restriction or further registration
unless held by an "affiliate" of the Company, as that term is defined under the
Securities Act of 1933, as amended (the "Securities Act"). The approximately
1,053,000 remaining outstanding shares of Common Stock currently are eligible
for sale in the public market, subject to compliance with the requirements of
Rule 144 under the Securities Act. The Company has registered for sale an
aggregate of 1,306,665 shares of Common Stock that are reserved for issuance
pursuant to the 1990 Plan, the 1995 Plan, and the Purchase Plan. Shares issued
upon the exercise of stock options issued under the Company's stock option plans
or pursuant to the Purchase Plan generally will be eligible for sale in the
public market. The Company also has the authority to issue additional shares of
Common Stock and shares of preferred stock. The issuance of such shares could
result in the dilution of the voting power of outstanding shares of Common Stock
and could have a dilutive effect on earnings per share.
Change in Control Provisions
The Company's Amended and Restated Articles of Incorporation (the
"Restated Articles") and Amended and Restated Bylaws (the "Bylaws") and certain
provisions of the Arizona Revised Statutes (the "Arizona Corporate Takeover
Act") contain provisions that may have the effect of making more difficult or
delaying attempts by others to obtain control of the Company, even when these
attempts may be in the best interests of shareholders. The Restated Articles
authorize the Board of Directors, without shareholder approval, to issue one or
more series of preferred stock that could have voting and conversion rights
adversely affecting the voting power of the holders of Common Stock. The Arizona
Corporate Takeover Act (i) places restrictions on the Company's ability to
purchase shares of its capital stock from persons that hold more than 5% of the
voting power of the Company; (ii) limits the voting power of certain shares held
by persons engaged in a "control share acquisition" (as such term is defined in
the Arizona Corporate Takeover Act); and (iii) imposes conditions on certain
business combination transactions with "interested shareholders" (as defined in
the Arizona Corporate Takeover Act).
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and
does not anticipate that it will pay dividends in the foreseeable future.
Instead, the Company intends to apply any earnings to the expansion and
development of its business. Furthermore, the terms of the Company's existing
revolving line of credit facility prohibit the Company from paying dividends
without the consent of the lender. Such restrictions could limit the Company's
ability to pay dividends in the future.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information contained in this Report,
particularly under the headings "Business," "Special Considerations," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," concerning future, proposed, and anticipated activities of the
Company, certain trends with respect to
15
<PAGE>
the Company's revenue, operating results, capital resources, and liquidity or
with respect to the markets in which the Company competes or the software,
retail, or warehouse industries in general, and other statements contained in
this Report regarding matters that are not historical facts are forward-looking
statements, as such term is defined in the Securities Act. Forward-looking
statements, by their very nature, include risks and uncertainties, many of which
are beyond the Company's control. Accordingly, actual results may differ,
perhaps materially, from those expressed in or implied by such forward-looking
statements. Factors that could cause actual results to differ materially include
those discussed elsewhere under Item 1, "Business - Special Considerations."
ITEM 2. PROPERTIES
The Company leases, for a term expiring in April 1998, approximately
20,730 square feet of space in Phoenix, Arizona, where it maintains product
engineering and design laboratories, software development facilities, testing
laboratories, customer service support facilities, employee training facilities,
sales and marketing offices, and administrative and executive offices.
ITEM 3. LEGAL PROCEEDINGS
On May 30, 1997, Hagemeyer Foods North America, Inc. ("Hagemeyer")
filed suit against the Company in the United States District Court for the
Eastern District of Wisconsin (Case No. 97-C-0635). The complaint alleges that
the Company breached its contract with Hagemeyer by (i) failing to deliver and
install certain software products, (ii) failing to use its best efforts to
achieve productive use of the Company's software products, and (iii) failing to
provide its professional consulting services in a reasonable, workmanlike
manner. Hagemeyer is seeking an unspecified amount of damages and a declaratory
judgment with respect to the parties' respective rights and legal obligations.
The complaint also alleges that the Company acted in a fraudulent manner by
making false representations to Hagemeyer in connection with the contractual
agreements between the Company and Hagemeyer. On October 15, 1997, the court
dismissed Hagemeyer's fraud claim against the Company. The Company has filed a
counterclaim for the amounts that the Company claims Hagemeyer owes under the
contract and has filed an answer denying Hagemeyer's claims in the complaint.
The Company intends to vigorously pursue its counterclaim and to vigorously
defend the lawsuit by Hagemeyer. In the event that the Company is unable to
obtain a successful decision on its counterclaim or a decision adverse to the
Company is rendered with respect to the claims by Hagemeyer, the resolution of
this matter could have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been quoted on the Nasdaq National
Market under the symbol "GDSC" since March 19, 1996. The following table sets
forth the quarterly high and low closing sale prices of the Company's Common
Stock for the calendar periods indicated on the Nasdaq National Market.
Common Stock
------------
High Low
---- ---
1996:
First Quarter (beginning March 19, 1996)............ $ 6.50 $ 5.00
Second Quarter...................................... 7.38 4.50
Third Quarter....................................... 6.13 4.00
Fourth Quarter...................................... 16.50 4.63
1997:
First Quarter....................................... $15.48 $10.00
Second Quarter...................................... 11.00 3.75
Third Quarter....................................... 5.50 3.25
Fourth Quarter (through October 28, 1997)........... 4.13 1.25
As of October 28, 1997, there were approximately 90 holders of record
and approximately 800 beneficial owners of the Company's Common Stock. On
October 28, 1997, the closing sales price of the Company's Common Stock on the
Nasdaq National Market was $1.25 per share. On October 8, 1997, Nasdaq advised
the Company that the Common Stock may be delisted as a result of the Company's
failure to timely file reports, including this Report on Form 10-KSB, with the
Securities and Exchange Commission and Nasdaq.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the fiscal years
ended January 31, 1995, 1996, and 1997 have been derived from the Company's
audited consolidated financial statements. The selected consolidated financial
data should be read in conjunction with, and are qualified by reference to, the
Company's Consolidated Financial Statements and Notes thereto and "Management
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Report.
<TABLE>
<CAPTION>
Year Ended January 31,
--------------------------------------
1995 1996 1997
---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product ................................... $ 18,956 $ 19,544 $ 20,324
Software license .......................... 1,009 2,947 4,082
Professional services ..................... 741 1,449 2,750
-------- -------- --------
Total revenue ........................ 20,706 23,940 27,156
Expenses:
Cost of products sold ..................... 13,870 14,240 14,487
Software development ...................... 2,141 2,877 3,693
Professional services ..................... 1,093 1,795 2,523
Sales and marketing ....................... 1,453 1,627 1,927
General and administrative ................ 1,059 1,546 1,947
-------- -------- --------
Income from operations .......................... 1,090 1,855 2,579
-------- -------- --------
Other income (expense):
Interest expense, net ..................... (554) (777) (266)
Other, net ................................ (30) 6 98
-------- -------- --------
Total and other income (expense) ..... (524) (771) (168)
-------- -------- --------
Income before income taxes ...................... 566 1,083 2,411
Provisions for income taxes ..................... -- -- 98
-------- -------- --------
Net income ...................................... $ 566 $ 1,083 $ 2,313
======== ======== ========
Net income per common and common share equivalent $ 0.39 $ 0.71 $ 0.81
======== ======== ========
Common and common share equivalents outstanding . 1,662 1,601 2,843
======== ======== ========
As of January 31,
--------------------------------------
1995 1996 1997
---- ---- ----
(in thousands)
Balance Sheet Data:
Cash and cash equivalents........................ $ 312 $ 93 $ 936
Working capital (deficit)........................ (2,706) (1,194) 5,490
Total assets..................................... 5,847 7,138 15,598
Long-term debt, less current portion............. 1,134 1,252 281
Deferred revenue (long-term)..................... 1,168 1,769 1,785
Total shareholders' equity (deficit)............. (3,773) (1,461) 7,493
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
Statement Regarding Forward-Looking Statements
The statements contained in this Report on Form 10-KSB 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 fiscal 1998 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 Report 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
Item 1, "Special Considerations."
Operations
The Company designs, develops, markets, and implements software
products and provides related customer support services for retail applications
and warehouse automation. 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 has derived its revenue
primarily from sales of hardware and software products developed by third
parties, primarily IBM. Sales of IBM products (hardware, software and
maintenance) accounted for approximately 66% and 56% of the Company's total
revenue for the years ended January 31, 1996 and 1997, respectively. 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 has used a
substantial portion of the proceeds from its March 1996 initial public offering
to significantly accelerate the transition of its business focus to proprietary
software products. The Company's reseller agreement with IBM expired in
accordance with its terms in July 1997. 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 result in lower total revenue, it will result in a
more favorable gross profit margin for the Company as sales of software and
services become a higher percentage of total revenue.
The Company has marketed the Kinetics warehouse management software
product for several years and will continue its current sales efforts dedicated
to this product and related services. Kinetics currently operates only on the
IBM AS/400 family of midrange computers. To date, the Company has derived
substantially all of its software revenue from Kinetics and other IBM-based
software products. Future revenue from sales of Kinetics and related services
will depend upon continued widespread use of IBM midrange computers and upon the
continued support of such computers by IBM. In addition, the Company will be
required to adapt Kinetics to any changes made by IBM to the AS/400's operating
system software. A significant shift away from IBM midrange computer systems by
the Company's customers or the failure by IBM to continue its support of these
systems could have a material adverse effect on the Company.
During the year ended January 31, 1997, the Company introduced
Transact, a point-of-sale software product developed in Java(TM) that can be
utilized on a wide variety of point-of-sale hardware platforms. Subsequent to
January 31, 1997, the Company introduced MarketBuilder, a relationship marketing
system for retailers, and
19
<PAGE>
Crossfire, an Internet-based store communication system, both of which
are also developed in Java(TM). The Company intends to increase the resources
dedicated to software development and marketing in support of its newly
introduced retail point-of-sale software products. In conjunction with its
increased focus on software development and marketing and its reduced emphasis
on reselling the products of others, the Company has streamlined its workforce
such that approximately 40 positions that were not directly related to software
development and marketing were eliminated in August 1997. Although the Company
has not yet generated significant sales of its new Java(TM)-based products, it
expects that the functionality of its new products, the flexibility of
Java(TM)-based software, and the personnel changes that have been made to focus
on software development and marketing efforts will result in sufficient future
revenue to fund its ongoing operations.
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 as well as 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 software and hardware
products 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 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,
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.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of total revenue represented by certain expense and revenue items:
Year Ended January 31,
----------------------------
1995 1996 1997
---- ---- ----
Revenue:
Product ............................... 91% 82% 75%
Software license ...................... 5% 12% 15%
Professional services ................. 4% 6% 10%
---- ---- ----
Total revenue .................... 100% 100% 100%
Expenses:
Cost of products sold ................. 67% 59% 53%
Software development .................. 10% 12% 14%
Professional services ................. 5% 7% 9%
Sales and marketing ................... 7% 7% 8%
General and administrative ............ 5% 6% 7%
---- ---- ----
Income from operations ...................... 5% 8% 9%
---- ---- ----
Other income (expense):
Interest expense, net ................. (2)% (3)% 1%
Other, net ............................ 0% 0% 0%
---- ---- ----
Total other income (expense) ..... (2)% (3)% 1%
---- ---- ----
Income before income taxes .................. 3% 5% 9%
Provision for income taxes .................. 0% 0% 0%
---- ---- ----
Net income .................................. 3% 5% 9%
==== ==== ====
20
<PAGE>
Results of Operations of the Company for the Years Ended January 31, 1996 and
1997
Revenue. Total revenue increased by 13% from approximately $23.9
million in the year ended January 31, 1996 to approximately $27.2 million in the
year ended January 31, 1997. Product revenue increased by 4% from approximately
$19.5 million to approximately $20.3 million during the same periods. As a
percentage of total revenue, product revenue decreased from 82% during the year
ended January 31, 1996 to 75% during the year ended January 31, 1997. Software
license revenue increased by 38% from approximately $2.9 million in the year
ended January 31, 1996 to approximately $4.1 million in the year ended January
31, 1997. As a percentage of total revenue, software license revenue increased
from 12% to 15% during the same periods. Professional services revenue increased
90% from approximately $1.4 million to approximately $2.8 million during the
years ended January 31, 1996 and 1997, respectively. As a percentage of total
revenue, professional services revenue increased from 6% to 10% during the years
ended January 31, 1996 and 1997, respectively.
The overall increase in total revenue is attributed to increases in
software and professional services. 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 increased slightly during the year
ended January 31, 1997, the Company continues to believe that revenue from
third-party products will decrease as a percentage of total revenue and that the
total dollar amounts of revenue from third-party products may decrease in the
future, particularly after the expiration of the reseller agreement with IBM in
July 1997.
Cost of Products Sold. Cost of products sold increased 2% from
approximately $14.2 million during the year ended January 31, 1996 to
approximately $14.4 million during the year ended January 31, 1997. This
increase is attributed to the corresponding increase in sales of third-party
products during the same period. As a percentage of product revenue, cost of
products sold was approximately 73% and 71% during the years ended January 31,
1996 and 1997, respectively.
Software Development Expense. Software development expense increased
from approximately $2.9 million to approximately $3.7 million during the years
ended January 31, 1996 and 1997, respectively. The 28% 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 12% in the year ended January 31, 1996
to 14% in the year ended January 31, 1997.
Professional Services Expense. Professional services expense increased
by 41% from approximately $1.8 million to approximately $2.5 million during the
years ended January 31, 1996 and 1997, respectively. Salaries and other expenses
for additional personnel contributed to this increase. As a percentage of
professional services revenue, professional services expense decreased from 123%
in the year ended January 31, 1996 to 92% in the year ended January 31, 1997.
This decrease as a percentage is attributed to better utilization of
professional services personnel.
Sales and Marketing Expense. Sales and marketing expense increased 18%
from approximately $1.6 million to approximately $1.9 million in the years ended
January 31, 1996 and 1997, 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 $1.5 million in the year ended January 31, 1996 to
approximately $1.9 million in the year ended January 31, 1997. This 26% increase
is attributed to additional personnel and associated costs, additional insurance
costs, and increased building rent costs.
21
<PAGE>
Other Income (Expense). Interest expense was approximately $777,000
during the year ended January 31, 1996, as compared with approximately $266,000
during the year ended January 31, 1997. In September 1995, the Company converted
approximately $1.2 million of debt into shares of Common Stock. Interest expense
related to that debt, together with interest expense attributable to vendor late
payments that were incurred during the year ended January 31, 1996, were not
incurred during the year ended January 31, 1997.
Net Income. Net income increased 122% from approximately $1.1 million,
or $.71 per share, in the year ended January 31, 1996 to approximately $2.3
million, or $.81 per share, in the year ended January 31, 1997. The Company
attributes this increase to the 66% decrease in interest expense during the
comparable periods, together with the 39% increase in income from operations.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters in the period ending January 31, 1997.
All quarterly information was obtained from unaudited financial statements not
otherwise contained herein. The Company believes that all necessary adjustments
have been made to present fairly the quarterly information when read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Report. The operating results for any quarter are not
necessarily indicative of the results of the full year or any future quarter.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------
Apr 30 July 31 Oct 31 Jan 31 Apr 30 July 31 Oct 31 Jan 31
1995 1995 1995 1996 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue .................. $ 6,882 $ 3,968 $ 5,982 $ 2,711 $ 969 $ 6,251 $ 7,163 $ 5,941
Software license revenue ......... 484 1,074 446 943 1,296 1,086 726 973
Consulting services revenue ...... 228 465 447 309 530 624 775 822
------- ------- ------- ------- ------- ------- ------- -------
Total revenue ................. 7,594 5,507 6,875 3,963 2,795 7,961 8,664 7,736
Expenses:
Cost of products sold ............ 5,357 2,870 4,484 1,529 557 4,598 4,910 4,422
Software development expense ..... 681 764 687 744 755 1,054 1,017 868
Consulting services expense ...... 425 431 450 488 489 708 794 531
Sales and marketing expense ...... 382 465 425 354 342 529 493 562
General and administrative expense 302 462 432 351 345 473 625 504
------- ------- ------- ------- ------- ------- ------- -------
Income from operations .............. 447 515 397 497 307 599 825 849
------- ------- ------- ------- ------- ------- ------- -------
Other income (expense):
Interest expense, net ............ (236) (217) (115) (210) (51) (36) (102) (77)
Other, net ....................... -- 3 -- 3 0 2 0 95
------- ------- ------- ------- ------- ------- ------- -------
Total other income (expense) .. (236) (214) (115) (207) (51) (34) (102) 18
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes .......... 211 301 282 290 256 565 723 867
Provision for income taxes .......... -- -- -- -- -- -- -- 98
------- ------- ------- ------- ------- ------- ------- -------
Net income .......................... $ 211 $ 301 $ 282 $ 290 $ 256 $ 565 $ 723 $ 769
======= ======= ======= ======= ======= ======= ======= =======
Net income per common and common
equivalent shares outstanding ..... $ 0.14 $ 0.20 $ 0.19 $ 0.18 $ 0.12 $ 0.19 $ 0.26 $ 0.24
Common and common equivalent shares
outstanding ....................... 1,557 1,567 1,544 1,381 2,215 2,921 2,820 3,256
</TABLE>
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
22
<PAGE>
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 often has 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.
Liquidity and Capital Resources
The Company's working capital position increased from a deficit of
approximately ($880,000) at January 31, 1996 to approximately $5.5 million at
January 31, 1997. In March 1996, the Company completed an initial public
offering of 1,250,000 shares of Common Stock and raised net proceeds of
approximately $6.9 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 $2.6 million for operations
during the year ended January 31, 1997, primarily as a result of the increase in
accounts receivable and inventories, partially offset by an increase in accrued
liabilities and deferred revenue. An increase in accounts receivable of
approximately $1.3 million is attributed to one customer. (See Note 2 of Notes
to Consolidated Financial Statements.)
Capital expenditures for the year ended January 31, 1997 totaled
approximately $1.9 million, of which approximately $1.4 million 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 $500,000 was used for the expansion of physical office space and
related purchases of furniture and fixtures.
Financing activities provided net cash of approximately $4.8 million in
the year ended January 31, 1997. The Company completed its initial public
offering in March 1996, which provided approximately $6.9 million, partially
offset by retirement of approximately $810,000 in bridge notes payable,
retirement of approximately $311,000 of amounts borrowed under the Company's
line of credit, and payments to officers and employees of approximately
$536,000.
During the year ended January 31, 1997, the Company had an agreement
with Concord Growth Corporation providing for a line of credit in the amount
that was the lower of $2.0 million or 75% of eligible accounts receivable. The
line of credit bore interest at the prime rate of interest quoted in the Wall
Street Journal on the first day of each month plus 8.0% and required a monthly
minimum payment of $5,000. The average outstanding balance was approximately
$841,400 and approximately $550,000 for the years ended January 31, 1996 and
1997, respectively. The weighted average interest rate was 16.0% and 16.25% for
the years ended January 31, 1996 and 1997, respectively. Subsequent to January
31, 1997, the Company canceled that line of credit and secured a borrowing
facility with Norwest Business Credit, Inc. That line of credit, which expires
on February 21, 2000, provides borrowing capacity in the amount of the lower of
$3.0 million or 80% of accounts receivable, plus the lower of $250,000 or 50% of
eligible inventory, as defined in the agreement. Borrowings under the line of
credit are secured by substantially all of the Company's tangible and intangible
assets. The agreement, as subsequently amended, requires a $5,000 minimum
monthly fee that includes interest calculated at the base lending rate (prime
rate) plus 2.0%, plus an unused facility fee of .25%. Had the new line of credit
been in place at
23
<PAGE>
January 31, 1997, the Company would have had approximately $1.0 million
available for advance under the line, based on eligible inventory and accounts
receivable balances.
The Company's financial statements for the year ended January 31, 1997,
have been prepared assuming that the Company will continue as a going concern.
The Company had negative cash flow from operations of $2,612,680 for the year
ended January 31, 1997, is in default of certain terms in its line of credit
agreement, recorded a net loss of approximately $702,000 (unaudited) for the six
months ended July 31, 1997, and has not yet generated sufficient revenue from
its software products to fund its ongoing operations. Additionally, its IBM
reseller agreement expired in July 1997. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The Company's plans
with regard to these matters are described in "Business Outlook and Risk
Factors," below. The Company's consolidated financial statements for the year
ended January 31, 1997, do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern. As a result of the factors described above, the
Company's auditors have reported to the Company that they are unable to express,
and do not express, an opinion on the Company's financial statements for the
year ended January 31, 1997.
As of October 28, 1997, the Company was in default under certain
covenants in the line of credit with Norwest. As a result, Norwest has the right
to demand payment of all amounts outstanding under the line of credit. In
addition, in October 1997 Norwest exercised its right to not provide any further
advances under the line of credit. In July 1997, Michael M. Gordon, the
Company's Chairman of the Board, President, and Chief Executive Officer and Mr.
Gordon's spouse personally guaranteed the Company's indebtedness under this line
of credit. The Company currently is seeking additional sources of financing,
which may include one or more private placements of debt or equity securities.
There can be no assurance that any additional financing will be available to the
Company or as to the terms of any such financing that is available. The
inability to obtain such financing could result in the inability of the Company
to continue as a going concern. If such financing is not available in sufficient
amounts or on satisfactory terms, the Company also may be unable to expand its
business or to develop new customers at the rate desired and its operating
results may be adversely affected.
Business Outlook and Risk Factors
The trends indicated by the Company's operating results for the year
ended January 31, 1997, coupled with the expiration of the IBM contract, reflect
the Company's belief that although total revenue may decrease in the near
future, software and services revenue should contribute to 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. 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 cycles; the complicated nature of the Company's
product installations; and unanticipated postponement or cancellation of
significant orders. There also can be no assurance that the Company's recently
introduced software products will achieve market acceptance or that the Company
will be able to develop new products and services in a timely and cost-effective
manner. The failure of the Company to successfully develop and market its own
software products and to overcome the loss of revenue from the sale of hardware
and software products developed by others could have a material adverse effect
on the Company.
As a result of the factors described in "Liquidity and Capital
Resources," above, the Company is in default under certain covenants in its line
of credit agreement and the lender has exercised its right to not provide any
24
<PAGE>
further advances under the line of credit. In addition, the Company has not yet
generated sufficient revenue from its software products to fund its ongoing
operations. The Company currently is seeking additional sources of financing,
which may include one or more private placements of debt or equity securities.
There can be no assurance that such financing will be available.
During July 1997, the Company's reseller agreement with IBM expired and
the Company entered into an agreement with Information Systems of North
Carolina, Inc. with respect to future sales of specified IBM AS/400 and related
products and services to certain of the Company's customers. Under this
agreement, the Company has ceased selling, and ISI has begun selling, the
specified AS/400-related products and services to the designated customers (as
defined). The agreement provides that ISI will pay to the Company 50% of its
operating profits (as defined) from sales of the specified products to the
designated customers during the four-year term of the agreement. The Company has
the right to terminate the agreement and resume direct sales of the specified
AS/400-related products and services to the designated customers in the event
that ISI's payments to the Company are less than $50,000 in each of two
consecutive quarterly periods. In addition, ISI has the right to terminate the
agreement upon written notice to the Company, provided that ISI ceases selling
the specified AS/400-related products and services to the designated customers
for a period of two years after such termination. As of the date of this Report,
this arrangement has not provided the Company with any revenue, and there can be
no assurance that the Company will derive significant revenue from this
arrangement in the future.
The Company continues to invest in sales and marketing in order to
enhance its image and brand awareness. The Company added new marketing and sales
personnel during the last 12 months, updated its industry trade-show presence
and image, invested heavily in collateral marketing materials, and redefined the
Company's image 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 has hired a new Vice President - Marketing and Chief
Operating Officer who has considerable experience in the sale of software
products to retail enterprises and in the management of software development
companies. The Company believes that this individual's expertise in the
development of retail software applications, his contacts in the retail
industry, and his expertise in the management of software development companies
will enhance the Company's ability to successfully transition from a hardware
reseller to a licenser of its proprietary software products.
The Company operates in an industry that is characterized by
fast-changing technology. As a result, the Company will be required to expend
substantial funds for continuing product development, including expenses
associated with research and development activities and additional engineering
and other technical personnel. There can be no assurance that such funds will be
available to the Company given its current financial condition and results of
operations. Any failure by the Company to anticipate or respond adequately to
technological developments, customer requirements, or new design and production
techniques, or any significant delays in product development or introduction,
could have a material adverse effect on the operating results of the Company.
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
25
<PAGE>
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
for its employees. The high cost associated with industry hiring practices could
have a material adverse effect 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
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 above and in Item 1, "Special
Considerations," as well as 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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the notes thereto and
reports thereon, commencing at page F-1 of this Report, which financial
statements, report, notes and data are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective December 11, 1995, the Company and its former auditors,
Deloitte & Touche LLP ("Deloitte & Touche"), mutually agreed to the cessation of
the client-auditor relationship and on December 28, 1995, the Company retained
Arthur Andersen LLP ("Arthur Andersen") as its independent public accountants.
The change in independent public accountants was approved by the Board of
Directors of the Company. Deloitte & Touche's report on the financial statements
of the Company for the years ended January 31, 1994 and 1995, which financial
statements have since been recalled by the Company, did not contain an adverse
opinion or a disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. Prior to retaining Arthur
Andersen, the Company had not consulted with Arthur Andersen regarding the
application of accounting principles or the type of opinion that might be
rendered on the Company's financial statements. The Company has authorized
Deloitte & Touche to respond fully to inquiries from Arthur Andersen.
During the term of Deloitte & Touche's engagement, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Deloitte & Touche, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report. However, Deloitte & touche advised the Company that they believed that,
during the term of its engagement by the Company, the internal controls
necessary for the Company to develop reliable financial statements did not
exist. Furthermore, prior to the cessation the client-auditor relationship,
Deloitte & Touche informed the Company that certain information regarding
revenue recognition had come to its attention that, if further investigated,
might affect the Company's previously issued financial statements. At the time
of the cessation of the client-auditor relationship, Deloitte & Touche had not
yet investigated such information.
26
<PAGE>
The Company made Arthur Andersen aware of the issues noted above prior
to their acceptance of the engagement as the Company's independent public
accountants. The Company has subsequently recalled its financial statements for
the years ended January 31, 1994 and 1995, that were previously reported on by
Deloitte & Touche.
27
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Directors and Executive Officers
The following table sets forth certain information regarding the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position Held
---- --- -------------
<S> <C> <C>
Michael M. Gordon 41 Chairman of the Board and President
Matthew J. Gordon 39 Vice President and Secretary
Steven A. Beck 57 Vice President - Marketing and Chief Operating Officer
Vickie B. Jarvis 35 Vice President-- Finance, Chief Financial Officer,
and Treasurer
Gregory S. Anderson 40 Director
Larry J. Wells 54 Director
Steven A. Rothstein 46 Director
Robert D. Bressler 49 Director
</TABLE>
Michael M. Gordon founded the Company in 1985 and has served as
President and a director of the Company since that time. Mr. Gordon has served
as Chairman of the Board since July 1989. Mr. Gordon was a marketing
representative with International Business Machines Corp. in Phoenix, Arizona
from 1980 until he founded the Company in 1985. From 1979 until 1980, Mr. Gordon
was Commercial Lending Manager at National City Bank in Cleveland, Ohio.
Matthew J. Gordon has served as Vice President - Store System Sales
since November 1986 and as Secretary of the Company since March 1993. From 1980
until October 1986, Mr. Gordon was an account executive with AT&T Corporation in
Phoenix, Arizona. Matthew J. Gordon is the brother of Michael M. Gordon.
Steven A. Beck has served as the Company's Vice President - Marketing
since March 1997 and as Chief Operating Officer since July 1997. Mr. Beck worked
as an independent consultant to the retial software industry from 1993 to March
1997. From 1986 to 1992, Mr. Beck served as a founder and Chief Executive
Officer of Comshare Retail, which developed and marketed ARTHUR, a leading
retail merchandise planning software product. Mr. Beck has worked in various
capacities in the retail and retail software and consulting industries since
1964, including six years as a senior executive at The Limited, Inc.
Vickie B. Jarvis has served as Vice President -- Finance and Chief
Financial Officer of the Company since July 1995. From September 1991 until July
1995, Ms. Jarvis was Manager, Strategic Programs of the Company. Ms. Jarvis was
an industry specialist at the Company from September 1989 until September 1991.
From 1986 until 1989, Ms. Jarvis was Controller at Cal-Pac Construction, a
subsidiary of David H. Murdock Companies in Los Angeles, California.
Gregory S. Anderson has served as a director of the Company since June
1989. Since October 1993, Mr. Anderson has served as President of Anderson Wells
Company, which manages Sundance Venture Partners, L.P., ("SVP"), a venture
capital firm. Mr. Anderson also has served as a director, Vice President,
Secretary, and Treasurer of Sundance Capital Corporation ("SCC") since May 1989.
Mr. Anderson also served as Managing Director of El Dorado Investment Company
("El Dorado"), a venture capital firm, from 1993 to 1996, and served as Vice
President of El Dorado from May 1986 to October 1993 and as General Manager of
El Dorado from
28
<PAGE>
February 1985 to October 1993. Mr. Anderson was employed by First Interstate
Bank of Arizona, N.A., from July 1979 to January 1985. Mr. Anderson currently
serves on the boards of directors of Megafoods Stores, Inc. and Regency Health
Services, Inc., which are publicly held companies. Megafoods Stores, Inc. has
filed for protection under the United States Bankruptcy Code. Mr. Anderson also
currently serves on the boards of directors of Spectrascan Imaging Services,
Inc., Border Alliance Trading Company, Nuclear Assurance Corporation, SA Oil and
Gas Company, SunVen Entertainment Group, Quality Care Solutions, Inc., and
Valley Commerce Bank, which are privately held.
Larry J. Wells has served as a director of the Company since June 1989.
Mr. Wells is the Chairman of Anderson Wells Company, which manages SVP. Mr.
Wells also has served as a director and President of Sundance Capital
Corporation since May 1989. From 1983 to 1987, Mr. Wells served as Vice
President of Citicorp Venture Capital and then became Senior Vice President of
Inco Venture Capital. From May 1969 to June 1983, Mr. Wells was the founder and
President of Creative Strategies International, a market research consulting
firm specializing in emerging markets. Mr. Wells currently serves on the board
of directors of Cellegy Pharmaceutical, Inc., Identix, Inc., and Telegen
Corporation, which are publicly held companies as well as VoiceCom Systems,
Inc., which is privately held.
Steven A. Rothstein has served as a director of the Company since March
1996. Mr. Rothstein has been Chairman of the Board of National Securities
Corporation, a securities broker-dealer and one of the underwriters of the
Company's initial public offering, since 1995. See "Certain Transactions." Mr.
Rothstein also serves as Chairman and President of Olympic Cascade Financial
Corporation, which is the parent holding company of National Securities
Corporation. From 1994 to 1995, Mr. Rothstein served as a Managing Director of
H.J. Meyers & Co., a securities broker-dealer. From 1992 to 1994, Mr. Rothstein
served as a Managing Director of Rodman and Renshaw, a securities broker-dealer.
From 1989 to 1992, Mr. Rothstein served as a Managing Director of Oppenheimer &
Co., a securities broker-dealer. From 1979 to 1989, Mr. Rothstein was a limited
partner of Bear Stearns & Co., a securities broker-dealer. Mr. Rothstein
currently is a director of SigmaTron International, Inc., New World Coffee,
Inc., Vita Food Products, Inc., and American Craft Brewing International
Limited, all of which are publicly held companies.
Robert D. Bressler has served as a director of the Company since
January 1997. Mr. Bressler has served as Chief Scientist - Networking for Sun
Microsystems, Inc., a $7 billion company that provides hardware, software, and
services for network computing and the Internet, since April 1994. From March
1990 to March 1994, Mr. Bressler held various senior technology positions,
including Senior Vice President of Corporate Development and Chief Technology
Officer, with Network Equipment Technologies, Inc. Mr. Bressler served as Vice
President Corporate Development and Chief Technical Officer of 3Com Corporation
("3Com") from March 1988 to March 1990 and as Vice President and General Manager
of Software Products of 3Com from 1986 to 1988. Mr. Bressler served as Senior
Vice President - Development and Engineering for BBN Communications Corp., a
subsidiary of Bolt Beranek and Newman Inc., from 1980 to 1986.
Key Employees
The Company has identified J. Michael McPheeters, Stephen M. Derbis,
and Mark J. Jarvis as key employees. Each of these individuals is a director of
one of the Company's key divisions.
J. Michael McPheeters cofounded the Company in 1985 and has served as
Vice President -- Client Services since that time. Mr. McPheeters served as a
director of the Company from 1985 until February 1994 and as Secretary from
October 1985 until July 1989.
Stephen M. Derbis has served as Director, Software Products of the
Company since February 1995. From May 1989 until February 1995, Mr. Derbis was
Manager, Server Software at FileNet Corporation in Costa Mesa, California. Mr.
Derbis is the brother-in-law of Michael M. Gordon.
29
<PAGE>
Mark J. Jarvis has served as Director of Client Services of the Company
since July 1993. From March 1990 until July 1993, Mr. Jarvis was Director,
Marketing Support at Applied Retail Solutions, a Phoenix, Arizona company
engaged in retail automation software development. From April 1987 until March
1990, Mr. Jarvis was Systems Engineering Manager of the Company. Mr. Jarvis is
the husband of Vickie B. Jarvis.
Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors,
officers, and persons who own more than 10 percent of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the SEC. Directors, officers, and greater than 10 percent
shareholders are required by the SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely upon the Company's
review of the copies of such forms received by it during the fiscal year ended
January 31, 1997 and written representations that no other reports were
required, the Company believes that each person who at any time during such
fiscal year was a director, officer, or beneficial owner of more than 10 percent
of the Company's Common Stock complied with all Section 16(a) filing
requirements during such fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table sets forth certain information concerning the
compensation for the fiscal years ended January 31, 1995, 1996, and 1997 earned
by the Company's Chief Executive Officer and by the Company's other executive
officer whose cash salary and bonus exceeded $100,000 during fiscal 1997 (the
"Named Officers"). No other officer of the Company received compensation of
$100,000 or more during fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
------------
Annual Compensation Securities All Other
------------------------- Underlying Compensation
Name and Principal Position Year Salary($)(1) Bonus($) Options(#)(2) ($)(3)
- --------------------------- ---- ------------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Michael M. Gordon 1997 $199,869 $ -- 62,500 $3,487
Chairman of the Board and 1996 149,038 113,981 -- --
President 1995 132,495 -- -- --
Matthew J. Gordon 1997 $131,733 $ -- 15,000 $2,435
Vice President and Secretary 1996 108,671 49,048 -- --
1995 95,106 -- -- --
</TABLE>
- ------------------
(1) Messrs. Gordon and Gordon also received certain perquisites, the value
of which did not exceed 10% of their salary and bonus during fiscal
1997. The Company offers its employees, including officers, medical and
life insurance benefits.
(2) The exercise price of all stock options granted were equal to the fair
market value of the Company's Common Stock on the date of grant.
(3) Amounts shown for fiscal 1997 represent matching contributions made by
the Company to the Company's 401(k) plan.
30
<PAGE>
Option Grants
The following table provides information on stock options granted to
the Company's Named Officers during the fiscal year ended January 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price
Name Granted (#)(1) Fiscal Year ($/Sh) Expiration Date
- ----------------- -------------- ----------- ------ ---------------
<S> <C> <C> <C> <C>
Michael M. Gordon........................ 62,500 13.8% $4.63 4/11/06
Matthew J. Gordon........................ 15,000 3.3% $4.63 4/11/06
</TABLE>
- ------------------
(1) The options were granted at the fair value of the shares on the date of
grant and have a ten-year term. Forty percent of the options vest and
become exercisable on the second anniversary of the date of grant, and
the remaining options vest and become exercisable at the rate of 20
percent on each of the third, fourth, and fifth anniversaries of the
date of grant.
Fiscal Year-end Option Values
The following table provides information on the value of the Company's
Named Officers unexercised options at January 31, 1997.
OPTION VALUES AS OF JANUARY 31, 1997
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the Money Options
Options at Fiscal Year-End(#) at Fiscal Year-End ($)(1)
----------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael M. Gordon..................... 0 62,500 $ 0 $507,813
Matthew J. Gordon..................... 9,200 21,333 $57,316 $161,330
</TABLE>
- ------------------
(1) Calculated based upon the closing price as reported on the Nasdaq
National Market on January 31, 1997 of $12.75 per share.
Recent Grants of Stock Options
Subsequent to January 31, 1997, the Company granted options to acquire
an aggregate of 428,100 shares of Common Stock. These options include options to
acquire 30,000, 40,000, 75,000, and 30,000 shares of Common Stock at an exercise
price of $12.25 per share issued to Michael M. Gordon, Matthew J. Gordon, Steven
A. Beck, and Vickie B. Jarvis, respectively, on March 13, 1997; options to
acquire 75,000 shares of Common Stock at an exercise price of $4.13 per share
issued to Steven A. Beck on July 17, 1997; and options to acquire 20,000 shares
of Common Stock at an exercise price of $5.50 per share issued to Matthew J.
Gordon on August 8, 1997.
31
<PAGE>
Director Compensation and Other Information
Employees of the Company do not receive compensation for serving as
members of the Company's Board of Directors. During 1996, non-employee directors
received an annual retainer of $5,000, which was increase to $10,000 per year
effective January 1, 1997. Non-employee directors also receive $1,000 for each
meeting attended in person, $500 for each meeting held or attended by telephone,
and $500 for each committee meeting held on a date other than on a date of a
meeting of the Board of Directors. All directors are reimbursed for their
expenses in attending meetings of the Board of Directors. Directors who are
employees of the Company are eligible to receive stock options under the
Company's 1995 Stock Option Plan. Directors who are not employees receive
automatic grants of stock options and restricted shares of Common Stock pursuant
to the Company's 1995 Stock Option Plan. See Item 10, "Executive Compensation -
Stock Option Plans."
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 (the "Internal Revenue Code"). 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 year ended January 31, 1997, the Company expensed
matching discretionary contributions pursuant to the 401(k) Plan to all
executive officers as a group in the amount of approximately $7,869.
Stock Option Plans
1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "1995 Plan") was adopted by
the Company's Board of Directors and approved by the shareholders of the Company
in October 1995. The 1995 Plan was amended by the Board of Directors, with
shareholder approval, in February 1996. In December 1996, the Board of Directors
amended the 1995 Plan to conform to changes to Rule 16b-3 under the Exchange
Act. Those amendments did not require shareholder approval. The Plan is intended
to comply with Rule 16b-3 as promulgated under the Exchange Act with respect to
persons subject to Section 16 of the Exchange Act. The Company believes that the
1995 Plan is important in attracting and retaining executives and other key
employees and that it constitutes a significant part of the compensation program
for key personnel, providing them with an opportunity to acquire a proprietary
interest in the Company and giving them an additional incentive to use their
best efforts for the long-term success of the Company. Options to acquire
537,150 shares of Common Stock were outstanding under the 1995 Plan as of
October 28, 1997. The 1995 Plan will remain in force until October 23, 2005.
The 1995 Plan provides for the granting of options to acquire Common
Stock of the Company ("Options"), the direct granting of Common Stock ("Stock
Awards"), the granting of stock appreciation rights ("SARs"), and the granting
of other cash awards ("Cash Awards") (Stock Awards, SARs, and Cash Awards are
collectively referred to herein as "Awards"). Options and Awards under the 1995
Plan may be issued to key personnel and others providing valuable services to
the Company. The Options issued may be incentive stock options or nonqualified
stock options.
A maximum of 800,000 shares of Common Stock of the Company may be
issued under the 1995 Plan. On September 30, 1997, the Company's Board of
Directors approved an amendment to increase the number of shares issuable under
the 1995 Plan to 1,200,000 shares, subject to shareholder approval of the
amendment on or before September 30, 1998. If any Option or SAR terminates or
expires without having been exercised in full, stock not issued under such
Option or SAR will again be available for the purposes of the 1995 Plan. If any
change is made in the stock subject to the 1995 Plan or subject to any Option or
Award granted under the 1995 Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, split-up, combination of
shares, exchange of shares, change in corporate structure, or otherwise), the
1995 Plan provides that appropriate
32
<PAGE>
adjustments will be made as to the maximum number of shares subject to the 1995
Plan and the number of shares and exercise price pet share of stock subject to
outstanding Options or Awards.
Options and Awards may be granted only to persons ("Eligible Persons")
who at the time of grant are either (i) key personnel, including officers and
directors, of the Company or its subsidiaries, or (ii) consultants and
independent contractors who provide valuable services to the Company or to its
subsidiaries. Options that are incentive stock options may only be granted to
key personnel of the Company or its subsidiaries who are also employees of the
Company or its subsidiaries.
The expiration date, maximum number of shares purchasable, and the
other provisions of the Options will be established at the time of grant.
Options may be granted for terms of up to ten years and become exercisable in
whole or in one or more installments at such time as may be determined by a plan
administrator upon grant of the Options. To exercise an Option, the optionholder
will be required to deliver to the Company full payment of the exercise price
for the shares as to which the option is being exercised. Generally, options can
be exercised by delivery of cash, check, or shares of Common Stock of the
Company.
Awards granted in the form of SARs entitle the recipient to receive a
payment equal to the appreciation in market value of a stated number of shares
of Common Stock from the price stated in the award agreement to the market value
of the Common Stock on the date first exercised or surrendered. Awards granted
in the form of Stock Awards entitle the recipient to directly receive Common
Stock. Cash Awards entitle the recipient to receive direct payments of cash
depending on the market value or the appreciation of the Common Stock or other
securities of the Company. The plan administrators may, consistent with the 1995
Plan, determine such other terms, conditions, restrictions, and limitations, if
any, on any Awards.
The 1995 Plan includes an automatic program that provides for the
automatic grant of restricted stock and stock options to non-employee directors.
Each of Gregory S. Anderson and Larry J. Wells, the non-employee directors
serving on the Board of Directors on the date the 1995 Plan was approved by the
Company's shareholders, received an automatic grant of 1,532 restricted shares
of Common Stock and options to acquire 4,600 shares of Common Stock (an "Initial
Grant") on that date, and each of Steven A. Rothstein and Robert D. Bressler
automatically received an Initial Grant on the date they became members of the
Board of Directors. Each subsequent newly elected non-employee member of the
Board will automatically receive an Initial Grant on the date of his or her
first appointment or election to the Board of Directors. In addition, options to
acquire 4,600 additional shares of Common Stock will be automatically granted to
each non-employee director on the date of each annual meeting of shareholders
(the "Annual Grant"). A non-employee director may not sell or otherwise transfer
the 1,532 shares of Common Stock granted in the Initial Grant for a period of
one year after the date of the Initial Grant. If a non-employee director ceases
serving as a member of the Board of Directors during the one-year period after
the date of the Initial Grant or does not attend at least 75% of the scheduled
meetings of the Board of Directors (including meetings of committees of which
such person is a member) during that one-year period, the 1,532 shares of Common
Stock granted in the Initial Grant will be forfeited and must be returned to the
Company. Any person who has previously received an Initial Grant is ineligible
to receive any subsequent Initial Grants. A non-employee member of the Board of
Directors is not eligible to receive the Annual Grant if that option grant date
is within 90 days of such non-employee member receiving the Initial Grant.
Options granted pursuant to the automatic program of the 1995 Plan become
exercisable on the first anniversary of the date of grant. The exercise price
per share of Common Stock subject to Options granted pursuant to the automatic
program of the 1995 Plan will be equal to 100% of the fair market value of the
Company's Common Stock (as defined in the 1995 Plan) on the date such Options
are granted.
1990 Stock Option Plan
The 1990 Stock Option Plan (the "1990 Plan") was adopted by the
Company's Board of Directors and approved by the shareholders of the Company in
September 1990. The 1990 Plan provides for the granting of incentive stock
options or nonqualified options to acquire Common Stock of the Company to
certain selected key
33
<PAGE>
employees, including executive officers and members of the Board of Directors of
the Company. No options may be granted under the 1990 Plan after September 11,
2000.
A maximum of 306,665 shares of the Company's Common Stock may be issued
under the 1990 Plan. If any option terminates or expires without having been
exercised in full, stock not issued under such option will again be available
for the purposes of the 1990 Plan. If any change is made in the stock subject to
the 1990 Plan, or subject to any option granted under the 1990 Plan (through
merger, consolidation, stock dividend, split-up, combination or exchange of
shares, or recapitalization or change in capitalization), the 1990 Plan provides
that the total number of shares available for options will be proportionately
and appropriately adjusted, and the number of shares and exercise price per
share of stock subject to outstanding options will be proportionately and
appropriately adjusted without any change in the aggregate exercise price. As of
October 28, 1997, there were outstanding options to acquire 334,375 shares of
the Company's Common Stock under the 1990 Plan.
To exercise an option, the optionholder will be required to deliver to
the Company full payment of the exercise price for the shares as to which the
option is being exercised. Generally, options can be exercised by delivery of
cash, check, bank draft, or money order.
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 six-month purchase periods
(a "Purchase Period"). Employees may purchase shares of Common Stock pursuant to
the 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 applicable
Purchase Period.
Limitation of Directors' Liability; Indemnification of Directors, Officers,
Employees, and Agents
The Company's Amended and Restated Articles of Incorporation (the
"Restated Articles") eliminate the personal liability of any director of the
Company to the Company or its shareholders for money damages for any action
taken or failure to take any action as a director of the Company, to the fullest
extent allowed by the Arizona Business Corporation Act (the "Business
Corporation Act"). Under the Business Corporation Act, directors of the Company
will be liable to the Company or its shareholders only for (a) the amount of a
financial benefit received by the director to which the director is not
entitled; (b) an intentional infliction of harm on the Company or its
shareholders; (c) certain unlawful distributions to shareholders; and (d) an
intentional violation of criminal law. The effect of these provisions in the
Restated Articles is to eliminate the rights of the Company and its shareholders
(through shareholders' derivative suits on behalf of the Company) to recover
money damages from a director for all actions or omissions as a director
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described in clauses (a) through (d) above. These
provisions do not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care.
The Company's Restated Articles require the Company to indemnify and
advance expenses to any person who incurs liability or expense by reason of such
person acting as a director of the Company, to the fullest extent allowed by the
Business Corporation Act. This indemnification is mandatory with respect to
directors in all circumstances in which indemnification is permitted by the
Business Corporation Act, subject to the requirements of the Business
Corporation Act. In addition, the Company may, in its sole discretion, indemnify
and advance expenses, to the fullest extent allowed by the Business Corporation
Act, to any person who incurs liability or expense by reason of such person
acting as an officer, employee or agent of the Company, except where
indemnification is mandatory pursuant to the Business Corporation Act, in which
case the Company is required to indemnify to the fullest extent required by the
Business Corporation Act. The Company currently has indemnification agreements
with each of its directors and executive officers.
34
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the shares
of the Company's outstanding Common Stock beneficially owned as of October 1,
1997 by (i) each of the Company's directors and executive officers, (ii) all
directors and executive officers as a group, and (iii) each other person who is
known by the Company to own beneficially or exercise voting or dispositive
control over more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
Number of Shares Approximate
and Nature of Percentage of
Name and Address of Beneficial Owner(1) Beneficial Ownership(2) Outstanding Shares(2)
- --------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Directors and Executive Officers:
Michael M. Gordon 535,615(3) 18.4%
Matthew J. Gordon 112,286(4) 3.9%
Steven A. Beck 0 *
Vickie B. Jarvis 60,590(5) 2.1%
Gregory S. Anderson 700,361(6) 23.1%
Larry J. Wells 700,361(7) 23.1%
Steven A. Rothstein 64,182(8) 2.2%
Robert D. Bressler 11,532 *
All directors and officers
as a group (eight persons) 1,494,836 45.4%
Other 5% Shareholders:
Anderson Wells Company 690,091(9) 22.8%
Sundance Venture Partners, L.P. 444,619(10) 14.7%
J. Michael McPheeters 280,065(11) 9.9%
Kennedy Capital Management, Inc.(12) 248,000 8.7%
Sundance Capital Corporation 245,472(13) 8.6%
Hathaway Partners Investment
Limited Partnership(14) 167,500 5.9%
</TABLE>
- --------------------
* Less than 1% of outstanding shares of Common Stock
(1) Each person named in the table has sole voting and investment power with
respect to all Common Stock beneficially owned by him or her, subject to
applicable community property law, except as otherwise indicated. Except as
otherwise indicated, each of such persons may be reached through the
Company at 3410 E. University Drive, Suite 100, Phoenix, Arizona 85034.
(2) The percentages shown are calculated based upon 2,838,138 shares of Common
Stock outstanding on October 1, 1997. The numbers and percentages shown
include the shares of Common Stock actually owned as of October 1, 1997 and
the shares of Common Stock that the identified person or group had the
right to acquire within 60 days of such date. In calculating the percentage
of ownership, all shares of Common Stock that the identified person or
group had the right to acquire within 60 days of October 1, 1997 upon the
exercise of options are deemed to be outstanding for the purpose of
computing the percentage of the shares of Common Stock owned by such person
or group, but are not deemed to be outstanding for the purpose of computing
the percentage of the shares of Common Stock owned by any other person.
(3) Represents 456,957 shares of Common Stock and 78,658 shares issuable upon
exercise of warrants held by Mr. Gordon.
(4) Represents 66,390 shares of Common Stock, 27,266 shares issuable upon
exercise of vested employee stock options, and 18,630 shares issuable upon
exercise of warrants held by Mr. Gordon.
35
<PAGE>
(5) Represents 30,257 shares of Common Stock issuable upon exercise of vested
employee stock options held by Ms. Jarvis and 30,353 shares of Common Stock
issuable upon exercise of vested employee stock options held by Ms. Jarvis'
husband.
(6) Represents 1,532 shares of Common Stock and 4,600 shares issuable upon
exercise of director stock options held by Mr. Anderson; 254,423 shares
held by Sundance Venture Partners, L.P.; 245,472 shares held by Sundance
Capital Corporation; and 190,196 shares issuable upon exercise of warrants
held by SVP. Mr. Anderson is President of Anderson Wells Company, which
manages SVP. Mr. Anderson also is a General Partner of SVP and a director
and officer of SCC. See footnotes 9, 10, and 13. Mr. Anderson disclaims
beneficial ownership of all shares held by each of SVP and SCC except to
the extent that his individual interest in such shares arises from his
interest in each such entity.
(7) Represents 1,532 shares of Common Stock and 4,600 shares issuable upon
exercise of director stock options held by Mr. Wells; 254,423 shares held
by Sundance Venture Partners, L.P; 245,472 shares held by Sundance Capital
Corporation; and 190,196 shares issuable upon exercise of warrants held by
SVP. Mr. Wells is Chairman of Anderson Wells Company, which manages SVP.
Mr. Wells also is a director of SVP and a director and officer of SCC. See
footnotes 9, 10, and 13. Mr. Wells disclaims beneficial ownership of all
shares held by each of SVP and SCC, except to the extent that his
individual interest in such shares arises from his interest in each such
entity.
(8) Represents 1,532 shares of Common Stock, 58,050 shares issuable upon
exercise of warrants, and 4,600 shares issuable upon exercise of director
stock options held by Mr. Rothstein.
(9) Represents 254,423 shares held by Sundance Venture Partners, L.P.; 245,472
shares held by Sundance Capital Corporation; and 190,196 shares issuable
upon exercise of warrants held by SVP. See footnotes 10 and 13. Anderson
Wells Company is a General Partner of SVP and is the sole owner of SCC. The
address of Anderson Wells Company is 400 E. Van Buren Street, Suite 750,
Phoenix, Arizona 85004.
(10) Represents 254,423 shares of Common Stock held by SVP and 190,196 shares
issuable upon exercise of warrants held by SVP. The address of SVP is 10600
N. DeAnza Boulevard, Suite 215, Cupertino, California 95014.
(11) Represents 278,465 shares held by Mr. McPheeters and 1,600 shares
beneficially owned by Mr. McPheeters as custodian for certain of his
children. Mr. McPheeters is Vice President - Client Services of the
Company.
(12) The address of Kennedy Capital Management, Inc. is 10829 Olive Boulevard,
St. Louis, Missouri 63141.
(13) The address of SCC is c/o Anderson Wells Company, 400 E. Van Buren Street,
Suite 750, Phoenix, Arizona 85004.
(14) The address of Hathaway Partners Investment Limited Partnership is 119
Rowayton Avenue, Rowayton, Connecticut 06853.
36
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 13, 1995, the Company issued notes in the amounts of
$190,000, $45,000, $10,000, $10,000, $400,000, and $5,000 to each of Michael M.
Gordon, Matthew J. Gordon, Gregory S. Anderson, Larry J. Wells, Sundance Venture
Partners, L.P, and Brian N. Burns (an officer of Anderson Wells Company),
respectively, in connection with a bridge financing. In March 1996, the Company
used a portion of the proceeds of its initial public offering to repay the
notes.
In March 1996, the Company completed its initial public offering by
selling an aggregate of 1,437,500 shares of Common Stock at an initial public
offering price of $6.75 per share. National Securities Corporation ("NSC"), of
which Steven A. Rothstein is Chairman of the Board, served as one of the
representatives of the underwriters of the offering. Pursuant to the terms of
the underwriting agreement between the Company and NSC, NSC appointed Mr.
Rothstein as its designee to be a director of the Company upon completion of the
offering.
In August 1996, the Company, Michael M. Gordon, Matthew J. Gordon,
Vickie B. Jarvis, and certain other employees of the Company formed Cyclone
Software Corporation ("Cyclone") in order to develop software applications
related to electronic commerce on the Internet. The Company, Michael M. Gordon,
Matthew J. Gordon, and Vickie B. Jarvis own 19.0%, 36.0%, 6.0%, and 6.0% of the
outstanding stock of Cyclone, respectively. During fiscal 1997, the Company's
executive officers and certain other employees who are shareholders of Cyclone
provided services to Cyclone valued at approximately $182,000.
In January 1997, the Company entered into an equipment lease agreement
with Anderson & Wells Investment Companies, an affiliate of Gregory S. Anderson
and Larry J. Wells, who are directors of the Company. The lease provides for
payments totalling approximately $675,000 to Anderson & Wells Investment
Companies during the period from January 1997 through November 1999.
37
<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 Second Amended and Restated 1995 Stock Option Plan, as amended through
December 6, 1996
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 December 6, 1996
10.14 Form of Indemnity Agreement(1)
11 Computation Re: Earnings Per Share
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
38
<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: October 29, 1997 /s/ Michael M. Gordon
---------------------
Michael M. Gordon, Chairman of the Board,
President, and Chief Executive Officer
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, President, and Chief October 29, 1997
- ----------------------------------- Executive Officer (Principal Executive Officer)
Michael M. Gordon
/s/ Vickie B. Jarvis Vice President - Finance, Chief Financial October 29, 1997
- ----------------------------------- Officer, and Treasurer (Principal Financial
Vickie B. Jarvis and Accounting Officer)
/s/ Gregory S. Anderson Director October 29, 1997
- -----------------------------------
Gregory S. Anderson
/s/ Larry J. Wells Director October 29, 1997
- -----------------------------------
Larry J. Wells
/s/ Steven A. Rothstein Director October 29, 1997
- -----------------------------------
Steven A. Rothstein
/s/ Robert D. Bressler Director October 29, 1997
- -----------------------------------
Robert D. Bressler
</TABLE>
39
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
----
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheet as of January 31, 1997....................... F-3
Consolidated Statements of Operations for the Years
Ended January 31, 1996 and 1997.................................... F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended January 31, 1996 and 1997.................................... F-5
Consolidated Statements of Cash Flows for the Years
Ended January 31, 1996 and 1997.................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended January 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to report 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 report.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
had negative cash flow from operations of $2,612,680 for the year ended January
31, 1997, is in default of the terms of its line of credit agreement, does not
have any readily available financing, is engaged in material litigation with a
significant customer, recorded a net loss of approximately $700,000 (unaudited)
for the six months ended July 31, 1997, and has not yet generated sufficient
revenue from its software products to fund its ongoing operations. Additionally,
its IBM reseller agreement expired in July 1997. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans with regards to these matters are described in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Because of the possible material effect of the matters discussed in the
preceding paragraph, we are unable to express, and do not express, an opinion on
the financial statements referred to above.
Arthur Andersen LLP
Phoenix, Arizona
October 27, 1997.
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JANUARY 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 936,232
Trade receivables -- less allowance of $112,300 (Note 5) 4,813,456
Inventories (Notes 1 and 5) 2,420,393
Prepaid expenses and other assets 432,140
-------------
Total current assets 8,602,221
PROPERTY AND EQUIPMENT -- Net (Notes 3 and 5) 1,794,894
NET INVESTMENT IN LEASE RESIDUALS (Note 4) 1,663,870
ACCOUNTS RECEIVABLE - LONG TERM (Note 8) 2,870,630
OTHER ASSETS (Notes 10 and 12) 666,883
-------------
$ 15,598,498
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,452,776
Accrued liabilities (Note 1) 2,889,574
Accrued payroll and benefits 346,319
Current portion of notes payable (Note 6) 161,438
Current portion of capital lease obligations (Note 7) 74,375
Deferred revenue 1,058,759
-------------
Total current liabilities 5,983,241
DEFERRED REVENUE, recognized after one year 1,785,266
NOTES PAYABLE, less current portion (Note 6) 280,600
CAPITAL LEASE OBLIGATIONS, less current portion (Note 7) 56,445
-------------
Total liabilities 8,105,552
-------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, 6, 7, 8 and 11)
SHAREHOLDERS' EQUITY (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,
2,813,312 shares issued and outstanding 28,133
Additional paid-in capital 9,203,940
Accumulated deficit (1,739,127)
-------------
Total shareholders' equity 7,492,946
-------------
$ 15,598,498
=============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1996 AND 1997
1996 1997
---- ----
REVENUE (Note 1):
Product $ 19,543,549 $ 20,324,310
Software license 2,947,205 4,081,808
Professional services 1,448,820 2,750,030
------------ ------------
Total revenue 23,939,574 27,156,148
------------ ------------
OPERATING EXPENSES:
Products sold 14,240,309 14,487,317
Software development 2,876,895 3,693,255
Professional services 1,794,591 2,523,424
Sales and marketing 1,626,538 1,926,925
General and administrative 1,546,021 1,946,415
------------ ------------
Total expenses 22,084,354 24,577,336
------------ ------------
INCOME FROM OPERATIONS 1,855,220 2,578,812
------------ ------------
OTHER (INCOME) EXPENSE:
Interest expense 777,422 265,936
Other, net (5,683) (97,787)
------------ ------------
Total other expense, net 771,739 168,149
------------ ------------
INCOME BEFORE INCOME TAXES 1,083,481 2,410,663
PROVISION FOR INCOME TAXES (Note 9) -- 97,500
------------ ------------
NET INCOME $ 1,083,481 $ 2,313,163
============ ============
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (Note 2) $ .71 $ .81
============ ============
COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (Note 2) 1,601,180 2,842,760
============ ============
See notes to consolidated financial statements.
F-4
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1996 AND 1997
<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, 1995 $ 10,459 1,045,920 $ 1,352,565 $ -- $(5,135,771) $(3,772,747)
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) (4,052,290) (1,460,711)
Net proceeds, initial public
offering ..................... 12,500 1,250,000 6,519,309 -- -- 6,531,809
Issuance of common stock to
non-employee directors ....... 15 1,532 -- -- -- 15
Amortization of deferred
compensation ................. -- -- -- 11,700 -- 11,700
Issuance of common stock
under Incentive Stock Option
Plan ......................... 86 8,536 42,390 -- -- 42,476
Issuance of common stock
under Employee Stock
Purchase Plan ................ 101 10,045 54,393 -- -- 54,494
Net income ..................... -- -- -- -- 2,313,163 2,313,163
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 31, 1997 ........ $ 28,133 2,813,312 $ 9,203,940 $ -- $(1,739,127) $ 7,492,946
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................... $ 1,083,481 $ 2,313,163
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization .................................... 344,775 585,976
Provision for doubtful accounts .................................. 53,100 22,200
Net loss on property dispositions and other ...................... -- 3,184
Recognition of non-employee director compensation ................ 3,900 11,700
Effect of changes in assets and liabilities:
Trade receivables ................................................ (1,435,824) (4,792,132)
Inventories ...................................................... 2,302,435 (2,032,352)
Prepaid expenses and other assets ................................ (928,846) (54,521)
Accounts payable ................................................. (410,566) 172,828
Accrued liabilities .............................................. 74,302 767,704
Accrued payroll and benefits ..................................... (226,109) 83,600
Deferred revenue ................................................. 122,377 265,980
----------- -----------
Net cash provided by (used in) operating activities .. 983,025 (2,652,670)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................... (801,135) (1,877,450)
Proceeds from sale of property and equipment ......................... -- 699,510
Net investment in lease residuals .................................... (1,034,236) (105,323)
----------- -----------
Net cash used in investing activities ................. (1,835,371) (1,283,263)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from additional borrowings on notes payable ................. 810,000 --
Principal payments on notes payable .................................. (113,000) (946,436)
Principal payments on capital lease obligations ...................... (204,534) (55,867)
Payments on line of credit ........................................... 311,555 (311,555)
Net proceeds from borrowings from (payments to) officers and employees (170,189) (536,172)
Proceeds from issuance of common stock ............................... -- 6,628,793
----------- -----------
Net cash provided by financing activities ............. 633,832 4,778,763
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................... (218,514) 842,830
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................ 311,916 93,402
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR .................................. $ 93,402 $ 936,232
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............................. $ 712,913 $ 293,112
=========== ===========
Cash paid during the period for income taxes ......................... $ -- $ 800
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations incurrred .................................. $ -- $ 66,344
=========== ===========
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
F-6
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS
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 for retail and warehouse management systems. The Company also provides
professional services including product installation, training, maintenance, and
customization in conjunction with sales of its software products.
The Company historically has generated the majority of its revenue from the
resale of hardware and software products produced by third parties, primarily
International Business Machines Corp. ("IBM") AS/400 and related peripheral
equipment. The Company also has historically generated a portion of it's revenue
from the sale of its proprietary software products, primarily the Kinetics(TM)
warehouse management system, which was developed exclusively for use on the
AS/400 platform, and from providing professional services related to these
products. Sales of IBM products, including hardware, software, and maintenance,
accounted for approximately 66% and 56% of the Company's total revenue for the
years ended January 31, 1996 and 1997, respectively. The Company's reseller
agreement with IBM expired in July 1997. During the year ended January 31, 1996,
the Company changed its business strategy to focus on the development and
marketing of its proprietary software products. In conjunction with this change
in strategy, the Company has since dedicated many of its resources to the
development and marketing of new software products. The Company anticipates that
this will result in a change in its revenue mix. The Company believes that,
although the change in revenue mix may initially result in lower total revenue,
it should also result in improved gross profit margins as software revenue
increases as a percentage of total revenue. There can be no assurance, however,
that the Company will be able to successfully complete this transition in its
business focus.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. However, the Company had negative
cash flow from operations of $2,612,680 for the year ended January 31, 1997, is
in default of certain terms of its line of credit agreement, does not have any
readily available financing , is engaged in material litigation with a
significant customer, recorded a net loss of approximately $700,000 (unaudited)
for the six months ended July 31, 1997, and has not yet generated sufficient
revenue from its software products to fund its ongoing operations. Additionally,
its IBM reseller agreement expired in July 1997. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
plans with regards to these matters are described below. The consolidated
financial statements have been prepared on a going concern basis and do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
The Company has marketed the Kinetics(TM) warehouse management software
product for several years and will continue its current sales efforts dedicated
to this product and related services. Kinetics currently operates only on the
IBM AS/400 family of midrange computers. To date, the Company has derived
substantially all of its software revenue from Kinetics and other IBM-based
software products. Future revenue from sales of Kinetics and related services
will depend upon continued widespread use of IBM midrange computers and upon the
continued support of such computers by IBM. In addition, the Company will be
required to adapt Kinetics to any changes made by IBM to the AS/400's operating
system software. A significant shift away from
F-7
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
IBM midrange computer systems by the Company's customers or the failure by IBM
to continue its support of these systems could have a material adverse effect on
the Company.
During the year ended January 31, 1997, the Company introduced
Transact(TM), a point-of-sale software product developed in Java(TM) that can be
utilized on a wide variety of point-of-sale hardware platforms. Subsequent to
January 31, 1997, the Company introduced MarketBuilder(TM), a relationship
marketing system for retailers, and Crossfire(TM), an Internet-based store
communication system, both of which are also developed in Java. The Company
intends to increase the resources dedicated to software development and
marketing in support of its newly introduced retail point-of-sale software
products. In conjunction with its increased focus on software development and
marketing and its reduced emphasis on reselling the products of others, the
Company has streamlined its workforce such that approximately 40 positions that
were not directly related to software development and marketing were eliminated
in August 1997. Although the Company has not yet generated significant sales of
its new Java-based products, it expects that the functionality of its new
products, the flexibility of Java-based software, and the personnel changes that
have been made to focus on software development and marketing efforts will
result in sufficient future revenue to fund its ongoing operations.
There can be no assurance that the Company's recently introduced software
products will achieve market acceptance or that the Company will be able to
develop new products and services in a timely and cost-effective manner. The
failure of the Company to successfully develop and market its own software
products and to overcome the loss of revenue from the sale of hardware and
software products developed by others could have a material adverse effect on
the Company.
The Company has hired a new Vice President - Marketing and Chief Operating
Officer who has considerable experience in the sale of software products to
retail enterprises and in the management of software development companies. The
Company believes that this individual's expertise in the development of retail
software applications, his contacts in the retail industry, and his expertise in
the management of software development companies will enhance the Company's
ability to successfully transition from a hardware reseller to a licenser of its
proprietary software products.
The Company operates in an industry that is characterized by fast-changing
technology. As a result, the Company will be required to expend substantial
funds for continuing product development, including expenses associated with
research and development activities and additional engineering and other
technical personnel. There can be no assurance that such funds will be available
to the Company given its current financial condition and results of operations.
Any failure by the Company to anticipate or respond adequately to technological
developments, customer requirements, or new design and production techniques, or
any significant delays in product development or introduction, could have a
material adverse effect on the operating results of the Company.
Other factors that could adversely impact the Company's total revenue and
product mix 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
cycles; the complicated nature of the Company's product installations; and
unanticipated postponement or cancellation of significant orders.
The Company has entered into an agreement with Information Systems of North
Carolina, Inc. ("ISI") with respect to future sale of specified IBM AS/400 and
related products and services to certain of the Company's customers. Under this
agreement, the Company has ceased selling, and ISI has begun selling, the
specified AS/400-related products and services to the designated
F-8
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
customers (as defined). The agreement provides that ISI will pay to the Company
50% of its operating profits (as defined) from sales of the specified products
to the designated customers during the four-year term of the agreement. The
Company has the right to terminate the agreement and resume direct sales of the
specified AS/400-related products and services to the designated customers in
the event that ISI's payments to the Company are less than $50,000 in each of
two consecutive quarterly periods. In addition, ISI has the right to terminate
the agreement upon written notice to the Company, provided that ISI ceases
selling the specified AS/400-related products and services to the designated
customers for a period of two years after such termination. As of the date of
this Report, this arrangement has not provided the Company with any revenue, and
there can be no assurance that the Company will derive significant revenue from
this arrangement in the future.
The Company's independent public accountants have reported to the Company
that, in the course of their audit of the Company's financial statements for the
fiscal year ended January 31, 1997 and their review of the unaudited financial
statements for the six months ended July 31, 1997, they discovered various
conditions that they believe constitute material weaknesses in the Company's
internal controls. These conditions consist of (i) weaknesses in forecasting
internal cash requirements; (ii) weaknesses in policies and procedures to ensure
the accurate timing, classification, and recording of significant transactions;
and (iii) weaknesses in maintaining formal documentation regarding acquisitions
and dispositions of assets. The Company has been taking various steps intended
to strengthen its financial controls, including engaging more experienced
personnel in both operational and financial positions.
2. 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 (specific
identification) or market. Inventories at January 31, 1997, consist of the
following:
New equipment........................................ $ 1,247,789
Used equipment....................................... 1,172,604
-----------
Total inventories $ 2,420,393
===========
The Company purchases substantially all new hardware, certain software
applications, and certain maintenance from IBM. During the years ended January
31, 1996 and 1997, approximately $15,635,000, and $15,259,300, or 66% and 56%,
respectively, of total revenue resulted from sales of such hardware, software,
and maintenance purchased from IBM .
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.
F-9
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. Accrued Liabilities -- Included in accrued liabilities is a payable of
approximately $2,580,300 representing amounts due for the termination of certain
customer-related third-party leases.
g. 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 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.
h. 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 expensed all such costs of software
development expenses in the accompanying consolidated statements of operations.
i. 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. SFAS NO. 128, Earnings
Per Share, was issued by the Financial Accounting Standard Board in March 1997.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and
when adopted, will require restatement of earnings per share for prior periods.
The pro forma disclosures of earnings per share under SFAS. No. 128 for the
years ending January 31, 1996
F-10
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
and 1997 are:
Year Ended January 31,
----------------------
1996 1997
---- ----
Net Income per Common and Common Equivalent Share
As reported .71 .81
Pro forma .73 .87
Common and Common Equivalent Shares Outstanding
As reported 1,601,180 2,842,760
Pro forma 1,543,199 2,651,964
j. Concentrations of Credit Risk -- Financial instruments which potentially
expose the Company to concentrations of credit risk, as defined by SFAS No. 105,
Disclosure of Information About Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk, consist
primarily of trade accounts receivable. The Company does not require collateral
upon delivery of its products or services. The Company has a receivable of
$2,870,630 from one customer, of which approximately $1.5 million is
approximately 364 days past due as a result of certain disputed amounts. The
Company intends to pursue collection of this receivable since it believes all
services were provided in accordance with its written contract with this
customer. Accordingly, no reserve has been established against the receivable.
On May 30, 1997, this customer filed a lawsuit against the Company, claiming
unspecified damages resulting from breach of contract and fraud related to the
Company's performance under its contract. The Company has filed a counterclaim
for the amounts that it claims the customer owes under the contract and has
filed an answer denying the customer's claims in the lawsuit. (See Note 8). In
the event that the Company is unable to obtain a successful decision on its
counterclaim or a decision adverse to the Company is rendered with respect to
the claims by the customer, the resolution of this matter could have a material
adverse effect on the Company.
k. Fair Value of Financial Instruments -- The Company estimates the fair
value of its monetary assets and liabilities based upon existing interest rates
related to such assets and liabilities compared to current rates of interest for
instruments with a similar nature and degree of risk. The Company estimates that
the carrying value of all of its monetary assets and liabilities approximates
fair value as of January 31, 1997.
l. Risks and Uncertainties -- The Company intends to develop and market new
software products and services to address customer needs and changes in
computing technology and methodology. There can be no assurance, however, that
the Company will be able to successfully complete the transition of its business
focus, that the Company's internally developed products will achieve increased
market acceptance, that the Company will be able to develop new products and
services in a timely and cost-effective manner, or that such products that are
developed will be accepted in the marketplace.
m. 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 was also adopted by the Company in fiscal 1997, did not 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, was also
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 (Note 8). SFAS NO. 128, Earnings Per Share, was issued by
the Financial Accounting Standard Board in March 1997. SFAS No. 128 is effective
for fiscal years ending after December 15, 1997, and when adopted, will require
restatement of earnings per share for prior periods.
F-11
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
n. Use of Estimates -- 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.
3. PROPERTY AND EQUIPMENT
Property and equipment at January 31, 1997, consist of the following:
Computer and office equipment............................ $ 1,945,864
Furniture and fixtures................................... 785,673
Leasehold improvements................................... 74,475
Other.................................................... 354,051
------------
3,160,063
Less accumulated depreciation and amortization........... (1,365,169)
------------
Property and equipment, net.............................. $ 1,794,894
============
Computer and office equipment includes $224,300, net, of equipment under
capital leases. Depreciation expense amounted to $586,000 in the current year.
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 these 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 consideration given by the Company to obtain the
end-of-lease purchase option, which represents the discount provided to the
customer from the fair market value of the products sold, is recorded as net
investment in lease residuals. Net investment in lease residuals represents less
than 10%, measured on a present value basis, of the fair value of the related
hardware sold.
5. LINE OF CREDIT
In August 1995, the Company obtained a line of credit from Concord Growth
Corporation 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 was secured by all of the Company's assets and was guaranteed by
the Company's President. The line of credit bore interest at the prime rate plus
8% and provided for a term expiring on August 22, 1997. The Company was 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 was due annually. The Company had no outstanding balance on this
line of credit at January 31, 1997. The average outstanding balance was $841,400
and $550,000 for the years ended January 31, 1996 and 1997, respectively. The
weighted average interest rate was 16% and 16.25% for the years ended January
31, 1996 and 1997, respectively. In February 1997, the Company terminated this
line of credit and replaced it with the line of credit discussed below.
On February 21, 1997, the Company obtained a line of credit from Norwest
Business Credit, Inc. ("Norwest") for borrowings in an amount that is the lower
of $3,000,000 or 80% of eligible accounts receivable, plus the lower of $250,000
or 50% of eligible inventory, as defined in the line of credit agreement. The
line of credit, as subsequently amended, bears interest at the base lending rate
(prime rate - 8.25% at January 31, 1997) plus 2.0% and matures on February 21,
2000. The Company
F-12
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
is required to pay a monthly minimum fee of $5,000 consisting of interest and
unused credit facility fees. Borrowings under the line of credit are secured by
substantially all of the Company's tangible and intangible assets. As of October
27, 1997, the Company was in default under certain covenants on this line of
credit. Accordingly, Norwest has the right to demand payment of all amounts
outstanding, which amounted to approximately $1,137,000 at October 27, 1997. In
addition, in October 1997 Norwest exercised its right to not provide any further
advances under the line. In July 1997, Michael M. Gordon, the Company's Chairman
of the Board, President, and Chief Executive Officer and Mr. Gordon's spouse
personally guaranteed the Company's indebtedness under this line of credit. The
Company currently is seeking additional sources of financing, which may include
one or more private placements of debt or equity securities. There can be no
assurance that any additional financing will be available to the Company or as
to the terms of any such financing that is available. The inability to obtain
such financing could result in the inability of the Company to continue as a
going concern. If such financing is not available in sufficient amounts or on
satisfactory terms, the Company also may be unable to expand its business or to
develop new customers at the rate desired and its operating results may be
adversely affected.
6. NOTES PAYABLE
Notes payable at January 31, 1997, consists of the following:
Note payable, interest at 15%, principal and interest of $18,682
due monthly through June 1999.................................. $ 442,038
Less current portion................................................ (161,438)
---------
$ 280,600
=========
At January 31, 1997, scheduled maturities for the years ending January 31
are as follows:
1998....................................................... $ 161,438
1999....................................................... 191,021
2000....................................................... 89,579
---------
$ 442,038
=========
In connection with the Company's initial public offering in March 1996
(Note 9) the Company retired $810,000 of notes payable that were issued in
connection with the issuance of bridge notes payable in October 1997. In
conjunction with those bridge notes, the Company also issued warrants to
purchase a total of 335,338 shares of the Company's common stock, as adjusted,
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.
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 non-cancelable operating leases for the years ended
January 31 are as follows:
1998.................................................... $ 690,781
1999.................................................... 377,957
2000.................................................... 234,442
-----------
Total.......................................... $ 1,303,180
===========
F-13
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Rental expense on operating leases was $507,676 and $442,500 for the years
ended January 31, 1996 and 1997, respectively. Included in these amounts are
operating lease expenses of $108,595 and $21,250 paid to an officer and other
employees for the years ended January 31, 1996 and 1997, respectively.
Included in operating lease commitments is a sale-leaseback transaction
which the Company entered into in 1996. The Company sold assets for
approximately $700,000 and has agreed to lease back the same items for
approximately $20,000 per month over a 36-month term. The lease contract matures
in November 1999.
Capital Leases -- The Company leases computer and telephone equipment under
capital leases (Note 3). Capital lease obligations bear interest rates ranging
from 9% to 17% and are due in varying monthly installments through January 2001.
At January 31, 1997, maturities for the years ending January 31 are as
follows:
1998 ............................................. $ 82,774
1999 ............................................. 19,269
2000 ............................................. 19,269
2001 ............................................. 19,269
2002 ............................................. 11,240
---------
Total ................................... 151,821
Less amount representing interest ................ (21,001)
---------
Total ................................... 130,820
Less current portion ............................. (74,375)
---------
Total ................................... $ 56,445
=========
8. OTHER
The Company is party to various legal and administrative proceedings
arising in the ordinary course of business. Management believes that the
eventual outcome of these proceedings will not have a material adverse affect on
the Company's financial position, results of operations or liquidity.
As discussed in Note 2, the Company is involved in a material dispute with
a customer. The dispute involves a receivable of $2,870,630 at January 31, 1997,
of which approximately $1.5 million was one year past due at that date. As of
May 30, 1997, the receivable balance was $3,683,575. On May 30, 1997, the
customer filed suit against the Company in the United States District Court for
the Eastern District of Wisconsin (Case No. 97-C-0635). The complaint alleges
that the Company breached its contract with the customer by (i) failing to
deliver and install certain software products, (ii) failing to use its best
efforts to achieve productive use of the Company's software products, and (iii)
failing to provide its professional consulting services in a reasonable,
workmanlike manner. The customer is seeking an unspecified amount of damages and
a declaratory judgment with respect to the parties' respective rights and legal
obligations. The complaint also alleged that the Company acted in a fraudulent
manner by making false representations to the customer in connection with the
contractual agreements between the Company and the customer. On October 15,
1997, the court dismissed the customer's fraud claims against the Company. The
Company has filed a counterclaim for the amounts that the Company claims the
customer owes under the contract and has filed an answer denying the customer's
claims in the complaint. The Company intends to vigorously pursue its
counterclaim and to vigorously defend the lawsuit by the customer. In the event
that the Company is unable to obtain a successful decision on its counterclaim
or a decision adverse to the
F-14
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Company is rendered with respect to the claims by the customer, the resolution
of this matter could have a material adverse effect on the Company.
9. CAPITAL STOCK
Reverse Stock Split -- Share amounts in the accompanying financial
statements and notes to financial statements give retroactive effect to a
one-for-two reverse stock split effected on October 25, 1995, a two-for-three
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.
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 $6.9 million. The Company used the proceeds to pay down the line
of credit (Note 5) and to retire the bridge notes payable (Note 6). The Company
has used 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.
1990 Stock Option Plan -- In fiscal 1991, the Company adopted the Gateway
Data Sciences Corporation Stock Option Plan (the "1990 Plan") which provides for
the grant of options intended to qualify as incentive stock options and
nonstatutory stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the Code). Incentive stock options are
issuable only to eligible officers and employees of the Company. Nonstatutory
options may be granted to employees, officers, directors or consultants of the
Company. The Company has reserved 306,665 shares of common stock for issuance
under the Plan. There were 100,381 and 148,903 shares available for issuance
under the 1990 Plan as of January 31, 1996 and 1997, respectively.
1995 Stock Option Plan -- In 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 ("Options"), the direct granting of common
stock, and the granting of stock appreciation rights ("SARs") and cash awards,
up to a maximum of 800,000 shares of common stock. If any Option or SAR
terminates or expires without having been exercised in full, stock not issued
under such Option or SAR will again be available for the purposes of the 1995
Plan. There were 787,736 and 232,442 shares available for issuance under the
1995 Plan at January 31, 1996 and 1997, respectively.
The Company's 1995 Plan includes an automatic program that provides for the
automatic grant of restricted stock and stock options to non-employee directors.
The automatic program provides that each person who first becomes an outside
director of the Company is automatically granted 1,532 shares of restricted
Common Stock and an option to purchase 4,600 shares upon the date on which the
optionee first becomes a director of the Company. A non-employee director may
not sell or otherwise transfer the 1,532 shares of Common Stock granted for a
period of one year after the date of the grant. In addition, each director
receives an additional 4,600 stock options on the date of each annual meeting
thereafter so long as the optionee remains an outside director. The exercise
price of all non-employee director options granted is equal to the fair market
value of a share of the Company's common stock on the date of grant of the
option. Options to purchase 9,200 and 13,800 shares of common stock had been
granted to directors at January 31, 1996 and 1997, respectively, at prices
ranging from $4.63 to $5.09 per share, of which options to purchase -0- and
9,200 shares were exercisable at January 31, 1996 and 1997, respectively.
F-15
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Under the 1990 Plan and 1995 Plan, the per share exercise price of an
incentive stock option may not be less than the fair market value of the common
stock on the date 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 1990 Plan and 1995 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. Under the 1990 Plan and
1995 Plan, incentive stock options may be exercised only if the option holder
remains continuously associated with the Company from the date of grant to a
date not less than 60 days prior to the date of exercise. Options granted under
the 1990 Plan or the 1995 Plan must be granted within 10 years from the
effective date of the respective plan. The exercise date of an option granted
under the 1990 Plan and 1995 Plan cannot be later than 10 years from the date of
grant, provided that the term of an incentive stock option is limited to five
years if the optionee is a person who owns stock representing more than 10% of
the voting power of the capital stock of the Company on the date of grant. Any
options that expire unexercised or that terminate upon an optionee's ceasing to
be employed by the Company become available for re-issuance pursuant to the
terms of the plan under which such options were originally issued.
A summary of the status of the Company's stock option plans at January 31, 1996
and 1997, and changes during the years then ended is presented below.
<TABLE>
<CAPTION>
1996 1997
------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 151,435 $5.91 206,284 $6.16
Granted................................... 113,678 $6.38 457,500 $5.27
Exercised................................. -- -- (8,536) $5.07
Forfeited................................. (58,829) $6.12 (92,286) $5.66
------- -------
Outstanding at end of year 206,284 $6.16 562,962 $5.91
======= =======
Exercisable at end of year 42,916 $5.72 54,676 $5.84
======= =======
Range of exercise prices...................... $4.88 - $7.83 $4.63 - $6.52
============== ==============
Weighted average fair value of options granted $5.30 $4.75
========= =========
</TABLE>
The weighted average remaining contractual life of all options is 8.85 years.
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 is divided into four consecutive
six-month purchase periods (a "Purchase Period"). Employees may purchase shares
of common stock pursuant to the 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. During the
period ended January 31, 1997, 10,045 shares of common stock were purchased by
employees at prices ranging between $5.42 and $5.53 per share.
F-16
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Common Stock Warrants -- At January 31, 1997, there are warrants
outstanding for the purchase of 335,338 shares of the Company's common stock at
$5.09 per share. These warrants were issued in connection with the bridge
financing discussed in Note 6. The warrants became exercisable on October 13,
1996.
On September 13, 1993, in connection with related debt obligations, the
Company entered into Stock Warrant Agreements with Sundance Venture Partners,
L.P. ("SVP") and El Dorado Investment Company ("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, 1997.
In conjunction with the Company's initial public offering on March 25, 1996
the Company sold to National Securities Corporation, the underwriters'
representative, warrants to purchase 125,000 shares of Common Stock. The
warrants have an exercise price of $10.13 (150% of the initial public offering
price), will be exercisable for a period of four years beginning on March 25,
1997, and contain certain anti-dilution, registration rights, net issuance and
exercise provisions.
Statement of Financial Accounting Standards No. 123 - During 1995, the
Financial Accounting Standards Board issued SFAS No. 123, Accounting for
Stock-Based Compensation, which defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure
compensation cost related to stock options issued to employees under these plans
using the method of accounting prescribed by the Accounting Principles Board
Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees. Entities
electing to remain with the accounting in APB No. 25 must make a pro forma
disclosures of net income and earnings per share, as if the fair value based
method of accounting defined in SFAS No.
123 has been applied.
The Company has elected to account for its stock-based compensation plans under
APB No. 25; therefore, the Company has computed for pro-forma disclosure
purposes the value of all options and warrants granted during 1995 and 1996;
using the following weighted average assumptions:
Risk free interest rate 6.49%
Expected dividend yield N/A
Expected lives 8 years
Expected volatility 96%
Options were assumed to be exercised over the eight year expected life for the
purpose of this valuation. Adjustments are made for options forfeited prior to
vesting. The total value of options and warrants granted was computed to be the
following approximate amounts, which would be amortized on the straight-line
basis over the vesting period of options and warrants:
Year ended January 31, 1996 $ 307,840
Year ended January 31, 1997 $1,652,073
F-17
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
If the Company had accounted for stock options issued to employees using a fair
value based method of accounting, the Company's net income and net income per
common and common equivalent share would have been as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------
1996 1997
---- ----
<S> <C> <C>
Net Income:
As reported $ 1,083,481 $ 2,313,163
Pro forma $ 923,488 $ 1,195,676
Net income per common share and common share equivalent:
As reported .71 $ .81
Pro forma $ .61 $ .42
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 1996 and 1997 are not likely to be representative of the effects on reported
net income and net income per common and common equivalent share for future
years, because options vest over several years and additional awards generally
are made each year.
10. 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:
Year Ended January 31,
----------------------
1996 1997
---- ----
Provision computed at the statutory federal rate . $ 368,000 $ 792,000
State income tax provision ....................... 65,000 140,000
Penalties ........................................ 111,000 1,000
Other ............................................ 10,000 20,000
Federal Alternative Minimum Tax .................. -- --
Utilization of net operating loss carryover ..... (554,000) (855,500)
--------- ---------
Total ........................................ $ -- $ 97,500
========= =========
A detail of the net deferred tax asset as of January 31, 1997 is as
follows:
Current:
Reserves not currently deductible ..................... $ 33,000
Other expenses not currently deductible ............... 47,000
Non Current:
Accelerated tax depreciation .......................... (36,000)
Tax effect of net operating loss carry forwards ....... 346,000
Other ................................................. 95,000
---------
485,000
Valuation allowance ....................................... (403,000)
---------
Net deferred tax asset .................................... $ 82,000
=========
The net deferred tax asset is included under "Other Assets" in the
accompanying balance sheet.
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 that some portion or all of the deferred tax assets will not be realized.
F-18
<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company's net operating loss ("NOL") carryovers expire through 2009.
Stock issuances by the Company 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 carry forwards 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 its financial condition.
11. 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 net income objective. For purposes of this plan, the Company did
not meet its net income objectives during the years ended January 31, 1996 and
1997.
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 1997, the Company
expensed discretionary contributions pursuant to the 401(k) Plan in the amounts
of $51,800 and $125,300 respectively.
12. 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 remaining
lease commitments due to officers and employees by the Company for various
computer operating leases expiring through the year ended January 31, 1998 in
the amount of approximately $23,000.
Included in Other Assets is a receivable due from a related entity of
approximately $182,000. The receivable is due to the Company for management and
consulting services provided during the year. Certain executives of the Company
maintain a direct interest and managerial role in the related entity. The
receivable is recorded as an arms-length transaction at the estimated fair value
of services performed. In addition, management believes the balance is fully
collectible and a valuation allowance has not been recorded.
In January 1997, the Company entered into an equipment lease agreement with
Anderson & Wells Investment Companies, an affiliate of Gregory S. Anderson and
Larry J. Wells, who are directors of the Company. The lease provides for
payments totaling approximately $675,700 to Anderson & Wells Investment
Companies during the period from January 1997 to November 1999.
F-19
<PAGE>
13. 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 1997
-------- ---------
Customer #1.................... 18.2% 31.2%
Customer #2.................... -- 21.6
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.
F-20
SECOND AMENDED AND RESTATED
GATEWAY DATA SCIENCES CORPORATION
1995 STOCK OPTION PLAN
(as amended through December 6, 1996)
ARTICLE I
General
1.1 Purpose of Plan; Term
(a) Adoption. On October 23, 1995, the Board of Directors (the
"Board") of Gateway Data Sciences Corporation, an Arizona corporation (the
"Company"), adopted the 1995 Stock Option Plan (the "Original Plan"). The
Original Plan was approved by the shareholders of the Company on that same date.
On December 28, 1995, the Company declared a two-for-three reverse stock split.
As a result, the number of shares available to be issued under the Original Plan
was reduced to 533,333. On February 15, 1996, the Board adopted an amended and
restated 1995 Stock Option Plan (the "First Revised Plan") whereby the available
shares under the Original Plan were increased and certain other matters were
clarified. The shareholders of the Company approved the First Revised Plan on
February 15, 1996. On December 6, 1996, the Board adopted this newly amended and
restated 1995 Stock Option Plan (the "Second Revised Plan") whereby certain
technical changes were made. The Second Revised Plan does not require approval
by the shareholders of the Company and shall be effective as of the date of its
adoption by the Board. The Second Revised Plan shall be known as the Gateway
Data Sciences Corporation Second Amended and Restated 1995 Stock Option Plan
(the "Plan"). When applicable, the term "Plan" shall include the Original Plan
and/or the First Revised Plan.
(b) Defined Terms. All initially capitalized terms used hereby
shall have the meaning set forth in Article V hereto.
(c) General Purpose. The Plan shall be divided into two
programs: the Discretionary Grant Program and the Automatic Grant Program.
(i) Discretionary Grant Program. The purpose of the
Discretionary Grant Program is to further the interests of the Company and its
shareholders by encouraging key persons associated with the Company (or Parent
or Subsidiary Corporations) to acquire shares of the Company's Stock, thereby
acquiring a proprietary interest in its business and an increased personal
interest in its continued success and progress. Such purpose shall be
accomplished by providing for the discretionary granting of options to acquire
the Company's Stock ("Discretionary Options"), the direct granting of the
Company's Stock ("Stock Awards"), the granting of stock appreciation rights
("SARs"), or the granting of other cash awards ("Cash Awards") (Stock Awards,
SARs and Cash Awards shall be collectively referred to herein as "Discretionary
Awards").
(ii) Automatic Grant Program. The purpose of the
Automatic Grant Program is to promote the interests of the Company by providing
non-employee members of the Company's Board the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Company and to thereby have an increased personal interest in its continued
success and
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progress. Such purpose shall be accomplished by providing for the automatic
grant of options to acquire the Company's Stock ("Automatic Options") and for
the automatic award of Stock ("Automatic Awards").
(d) Character of Options. Discretionary Options granted under
this Plan to employees of the Company (or Parent or Subsidiary Corporations)
that are intended to qualify as "incentive stock options" as defined in Code
section 422 ("Incentive Stock Options") will be specified in the applicable
stock option agreement. All other Options granted under this Plan will be
nonqualified options.
(e) Rule 16b-3 Plan. With respect to persons subject to
Section 16 of the Securities Exchange Act of 1934, as amended ("1934 Act"), the
Plan is intended to comply with all applicable conditions of Rule 16b-3 (and all
subsequent revisions thereof) promulgated under the 1934 Act. In such instance,
to the extent any provision of the Plan or action by a Plan Administrator fails
to so comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by such Plan Administrator. In addition, the Board may
amend the Plan from time to time as it deems necessary in order to meet the
requirements of any amendments to Rule 16b-3 without the consent of the
shareholders of the Company.
(f) Duration of Plan. The term of the Plan is 10 years
commencing on the date of adoption of the Plan by the Board as specified in
Section 1.1(a) hereof. No Option or Award shall be granted under the Plan unless
granted within 10 years of the adoption of the Plan by the Board, but Options or
Awards outstanding on that date shall not be terminated or otherwise affected by
virtue of the Plan's expiration.
1.2 Stock and Maximum Number of Shares Subject to Plan.
(a) Description of Stock and Maximum Shares Allocated. The
stock subject to the provisions of the Plan and issuable upon the grant of Stock
Awards or upon the exercise of SARs or Options granted under the Plan is shares
of the Company's common stock, $.01 par value per share (the "Stock"), which may
be either unissued or treasury shares, as the Board may from time to time
determine. Subject to adjustment as provided in Section 4.1 hereof, the
aggregate number of shares of Stock covered by the Plan and issuable thereunder
shall be 800,000 shares of Stock.
(b) Calculation of Available Shares. For purposes of
calculating the maximum number of shares of Stock which may be issued under the
Plan: (i) the shares issued (including the shares, if any, withheld for tax
withholding requirements) upon exercise of an Option shall be counted and (ii)
the shares issued (including the shares, if any, withheld for tax withholding
requirements) as a result of a grant of a Stock Award or an exercise of an SAR
shall be counted.
(c) Restoration of Unpurchased Shares. If an Option or SAR
expires or terminates for any reason prior to its exercise in full and before
the term of the Plan expires, the shares of Stock subject to, but not issued
under, such Option or SAR shall, without further action or by or on behalf of
the Company, again be available under the Plan.
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1.3 Approval; Amendments.
(a) Approval by Shareholders. The First Revised Plan was
approved by the shareholders of the Company on February 15, 1996. The date on
which such shareholder approval was obtained shall be referred to herein as the
"Effective Date."
(b) Commencement of Programs. The Discretionary Grant Program
became effective on October 23, 1995. The Automatic Grant Program became
effective on March 19, 1996, the first date that any equity security of the
Company became registered under Section 12 of the 1934 Act.
(c) Amendments to Plan. The Board may, without action on the
part of the Company's shareholders, make such amendments to, changes in and
additions to the Plan as it may, from time to time, deem necessary or
appropriate and in the best interests of the Company; provided, the Board may
not, without the consent of the applicable Optionholder, take any action which
disqualifies any Discretionary Option previously granted under the Plan for
treatment as an Incentive Stock Option or which adversely affects or impairs the
rights of the Optionholder of any Discretionary Option outstanding under the
Plan, and further provided that, except as provided in Article IV hereof, the
Board may not, without the approval of the Company's shareholders, (i) increase
the aggregate number of shares of Stock subject to the Plan, (ii) reduce the
exercise price at which Discretionary Options may be granted or the exercise
price at which any outstanding Discretionary Option may be exercised, (iii)
extend the term of the Plan, (iv) change the class of persons eligible to
receive Discretionary Options or Discretionary Awards under the Plan, or (v)
materially increase the benefits accruing to participants under the Plan.
Notwithstanding the foregoing, Discretionary Options or Discretionary Awards may
be granted under this Plan to purchase shares of Stock in excess of the number
of shares then available for issuance under the Plan if (A) an amendment to
increase the maximum number of shares issuable under the Plan is adopted by the
Board prior to the initial grant of any such Option or Award and within one year
thereafter such amendment is approved by the Company's shareholders and (B) each
such Discretionary Option or Discretionary Award granted is not to become
exercisable or vested, in whole or in part, at any time prior to the obtaining
of such shareholder approval.
ARTICLE II
Discretionary Grant Program
2.1 Participants; Administration.
(a) Eligibility and Participation. Discretionary Options and
Discretionary Awards may be granted only to persons ("Eligible Persons") who at
the time of grant are (i) key personnel (including officers and directors) of
the Company or Parent or Subsidiary Corporations, or (ii) consultants or
independent contractors who provide valuable services to the Company or Parent
or Subsidiary Corporations; provided that (1) if a Senior Committee exists, the
members of that Senior Committee shall be ineligible, during their tenure on the
Senior Committee, to be granted Discretionary Options or Discretionary Awards
under the Plan or to be granted or awarded equity securities of the Company
pursuant to any other plan of the Company or its affiliates except pursuant to
the Automatic Grant Program or as otherwise allowed under the 1934 Act, and (2)
Incentive Stock Options may only be granted to key personnel of the Company (and
its Parent or Subsidiary Corporation) who are also employees of the Company (or
its Parent or Subsidiary Corporation), and (3) the maximum number of shares of
Stock with respect to which Options or Awards may be granted to any employee
during the
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term of the Plan shall not exceed 50 percent of the shares of Stock covered by
the Plan. A Plan Administrator shall have full authority to determine which
Eligible Persons in its administered group are to receive Discretionary Option
grants under the Plan, the number of shares to be covered by each such grant,
whether or not the granted Discretionary Option is to be an Incentive Stock
Option, the time or times at which each such Discretionary Option is to become
exercisable, and the maximum term for which the Discretionary Option is to be
outstanding. A Plan Administrator shall also have full authority to determine
which Eligible Persons in such group are to receive Discretionary Awards under
the Discretionary Grant Program and the conditions relating to such
Discretionary Award.
(b) General Administration. The Eligible Persons under the
Discretionary Grant Program shall be divided into two groups and there shall be
a separate administrator for each group. One group will be comprised of Eligible
Persons that are Affiliates. For purposes of this Plan, the term "Affiliates"
shall mean all "officers" (as that term is defined in Rule 16a-1(f) promulgated
under the 1934 Act) and directors of the Company and all persons who own ten
percent or more of the Company's issued and outstanding equity securities.
Initially, the power to administer the Discretionary Grant Program with respect
to Eligible Persons that are Affiliates shall be vested with the Board. At any
time, however, the Board may vest the power to administer the Discretionary
Grant Program with respect to Persons that are Affiliates exclusively with a
committee (the "Senior Committee") comprised of two or more Non- Employee
Directors who are appointed by the Board. The Senior Committee, in its sole
discretion, may require approval of the Board for specific grants of
Discretionary Options or Awards under the Discretionary Grant Program. The
administration of all Eligible Persons that are not Affiliates ("Non-
Affiliates") shall be vested exclusively with the Board. The Board, however, may
at any time appoint a committee (the "Employee Committee") of two or more
persons who are members of the Board and delegate to such Employee Committee the
power to administer the Discretionary Grant Program with respect to the
Non-Affiliates. In addition, the Board may establish an additional committee or
committees of persons who are members of the Board and delegate to such other
committee or committees the power to administer all or a portion of the
Discretionary Grant program with respect to all or a portion of the Eligible
Persons. Members of the Senior Committee, Employee Committee or any other
committee allowed hereunder shall serve for such period of time as the Board may
determine and shall be subject to removal by the Board at any time. The Board
may at any time terminate all or a portion of the functions of the Senior
Committee, the Employee Committee, or any other committee allowed hereunder and
reassume all or a portion of powers and authority previously delegated to such
committee. The Board in its discretion may also require the members of the
Senior Committee, the Employee Committee or any other committee allowed
hereunder to be "outside directors" as that term is defined in any applicable
regulations promulgated under Code section 162(m).
(c) Plan Administrators. The Board, the Employee Committee,
Senior Committee, and/or any other committee allowed hereunder, whichever is
applicable, shall be each referred to herein as a "Plan Administrator." Each
Plan Administrator shall have the authority and discretion, with respect to its
administered group, to select which Eligible Persons shall participate in the
Discretionary Grant Program, to grant Discretionary Options or Discretionary
Awards under the Discretionary Grant Program, to establish such rules and
regulations as they may deem appropriate with respect to the proper
administration of the Discretionary Grant Program and to make such
determinations under, and issue such interpretations of, the Discretionary Grant
Program and any outstanding Discretionary Option or Discretionary Award as they
may deem necessary or advisable. Unless otherwise required by law or specified
by the Board with respect to any committee, decisions among the members of a
Plan Administrator shall be by majority vote. Decisions of a Plan Administrator
shall be final and binding
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<PAGE>
on all parties who have an interest in the Discretionary Grant Program or any
outstanding Discretionary Option or Discretionary Award.
(d) Guidelines for Participation. In designating and selecting
Eligible Persons for participation in the Discretionary Grant Program, a Plan
Administrator shall consult with and give consideration to the recommendations
and criticisms submitted by appropriate managerial and executive officers of the
Company. A Plan Administrator also shall take into account the duties and
responsibilities of the Eligible Persons, their past, present and potential
contributions to the success of the Company and such other factors as a Plan
Administrator shall deem relevant in connection with accomplishing the purpose
of the Plan.
2.2 Terms and Conditions of Options
(a) Allotment of Shares. A Plan Administrator shall determine
the number of shares of Stock to be optioned from time to time and the number of
shares to be optioned to any Eligible Person (the "Optioned Shares"). The grant
of a Discretionary Option to a person shall neither entitle such person to, nor
disqualify such person from, participation in any other grant of Options or
Stock Awards under this Plan or any other stock option plan of the Company.
(b) Exercise Price. Upon the grant of any Discretionary
Option, a Plan Administrator shall specify the option price per share. If the
Discretionary Option is intended to qualify as an Incentive Stock Option under
the Code, the option price per share may not be less than 100 percent of the
fair market value per share of the stock on the date the Discretionary Option is
granted (110 percent if the Discretionary Option is granted to a shareholder who
at the time the Discretionary Option is granted owns or is deemed to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any Parent or Subsidiary Corporation). The
determination of the fair market value of the Stock shall be made in accordance
with the valuation provisions of Section 4.5 hereof.
(c) Individual Stock Option Agreements. Discretionary Options
granted under the Plan shall be evidenced by option agreements in such form and
content as a Plan Administrator from time to time approves, which agreements
shall substantially comply with and be subject to the terms of the Plan,
including the terms and conditions of this Section 2.2. As determined by a Plan
Administrator, each option agreement shall state (i) the total number of shares
to which it pertains, (ii) the exercise price for the shares covered by the
Option, (iii) the time at which the Options vest and become exercisable and (iv)
the Option's scheduled expiration date. The option agreements may contain such
other provisions or conditions as a Plan Administrator deems necessary or
appropriate to effectuate the sense and purpose of the Plan, including covenants
by the Optionholder not to compete and remedies for the Company in the event of
the breach of any such covenant.
(d) Option Period. No Discretionary Option granted under the
Plan that is intended to be an Incentive Stock Option shall be exercisable for a
period in excess of 10 years from the date of its grant (five years if the
Discretionary Option is granted to a shareholder who at the time the
Discretionary Option is granted owns or is deemed to own stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or of any Parent or any Subsidiary Corporation), subject to earlier
termination in the event of termination of employment, retirement or death of
the Optionholder. A Discretionary Option may be exercised in full or in part at
any time or from time
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to time during the term of the Discretionary Option or provide for its exercise
in stated installments at stated times during the Option's term.
(e) Vesting; Limitations. The time at which the Optioned
Shares vest with respect to an Optionholder shall be in the discretion of that
Optionholder's Plan Administrator. Notwithstanding the foregoing, to the extent
a Discretionary Option is intended to qualify as an Incentive Stock Option, the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or its Parent or Subsidiary
Corporations) may for the first time become exercisable as Incentive Stock
Options during any one calendar year shall not exceed the sum of $100,000
(referred to herein as the "$100,000 Limitation"). To the extent that any person
holds two or more Options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which such
Options are granted.
(f) No Fractional Shares. Options shall be exercisable only
for whole shares; no fractional shares will be issuable upon exercise of any
Discretionary Option granted under the Plan.
(g) Method of Exercise. In order to exercise a Discretionary
Option with respect to any vested Optioned Shares, an Optionholder (or in the
case of an exercise after an Optionholder's death, such Optionholder's executor,
administrator, heir or legatee, as the case may be) must take the following
action:
(i) execute and deliver to the Company a written
notice of exercise signed in writing by the person exercising the Discretionary
Option specifying the number of shares of Stock with respect to which the
Discretionary Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 2.2(h) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Discretionary Option (if other than the
Optionholder) has the right to exercise such Option.
As soon as practicable after the Exercise Date, the Company shall mail or
deliver to or on behalf of the Optionholder (or any other person or persons
exercising this Discretionary Option in accordance herewith) a certificate or
certificates representing the Stock for which the Discretionary Option has been
exercised in accordance with the provisions of this Plan. In no event may any
Discretionary Option be exercised for any fractional shares.
(h) Payment of Option Price. The aggregate Option Price shall
be payable in one of the alternative forms specified below:
(i) Full payment in cash or check made payable to the
Company's order; or
(ii) Full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
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(iii) If a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
(i) Repurchase Right. The Plan Administrator may, in its sole
discretion, set forth other terms and conditions upon which the Company (or its
assigns) shall have the right to repurchase shares of Stock acquired by an
Optionholder pursuant to a Discretionary Option. Any repurchase right of the
Company shall be exercisable by the Company (or its assignees) upon such terms
and conditions as the Plan Administrator may specify in the Stock Repurchase
Agreement evidencing such right. The Plan Administrator may also in its
discretion establish as a term and condition of one or more Discretionary
Options granted under the Plan that the Company shall have a right of first
refusal with respect to any proposed sale or other disposition by the
Optionholder of any shares of Stock issued upon the exercise of such
Discretionary Options. Any such right of first refusal shall be exercisable by
the Company (or its assigns) in accordance with the terms and conditions set
forth in the Stock Repurchase Agreement.
(j) Termination of Incentive Stock Options.
(i) Termination of Service. If any Optionholder
ceases to be in Service to the Company for a reason other than death, such
Optionholder (or such Optionholder's successors in the case of the
Optionholder's death) may, within three months after the date of termination of
such Service, but in no event after the Incentive Stock Option's stated
expiration date, exercise some or all of the Incentive Stock Options that the
Optionholder was entitled to exercise on the date the Optionholder's Service
terminated; provided, that if Optionholder is discharged for Cause or commits
acts detrimental to the Company's interests after the Service of the
Optionholder has been terminated, then the Incentive Stock Options shall
thereafter be void for all purposes. "Cause" shall mean a termination of Service
based upon a finding by the Plan Administrator that the Optionholder (a) has
committed a felony involving dishonesty, fraud, theft or embezzlement; (b) has
repeatedly failed or refused, after written notice from the Company, in a
material respect to follow reasonable policies or directives established by the
Company; (c) has willfully and persistently failed, after written notice from
the Company, to attend to material duties or obligations imposed upon him; (d)
has performed an act or failed to act, which, if he were prosecuted and
convicted, would constitute a theft of money or property of the Company; or (e)
has misrepresented or concealed a material fact for purposes of securing
employment with the Company. Notwithstanding the foregoing, if any Optionholder
ceases to be in Service to the Company by reason of permanent disability within
the meaning of section 22(e)(3) of the Code (as determined by the applicable
Plan Administrator), the Optionholder shall have 12 months after the date of
termination of Service, but in no event after the stated expiration date of the
Optionholder's Incentive Stock Options, to exercise Incentive Stock Options that
the Optionholder was entitled to exercise on the date the Optionholder's Service
terminated as a result of disability.
(ii) Death of Optionholder. If an Optionholder dies
while in the Company's Service, the Optionholder's vested Incentive Stock
Options on the date of death shall be exercisable within
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three months of such death or until the stated expiration date of the
Optionholder's Incentive Stock Option, whichever occurs first, by the person or
persons ("successors") to whom the Optionholder's rights pass under a will or by
the laws of descent and distribution. As soon as practicable after receipt by
the Company of the notice of exercise and of payment in full of the Option Price
as specified in Sections 2.2(g) and (h) hereof, a certificate or certificates
representing the Optioned Shares shall be registered in the name or names
specified by the successors in the written notice of exercise and shall be
delivered to the successors.
(k) Termination of Nonqualified Options. Any Options which are
not Incentive Stock Options and which are exercisable at the time an
Optionholder ceases to be in Service to the Company shall remain exercisable for
such period of time thereafter as determined by the Plan Administrator at the
time of grant and set forth in the documents evidencing such Options. In the
absence of any provision in the documents evidencing such Option, the Option
shall remain exercisable (i) for a period of three months after termination as a
result of the Optionholder's death; (ii) for a period of 12 months if the
Optionholder ceases to be in service to the Company by reason of permanent
disability within the meaning of section 22(e)(3) of the Code); and (iii) for a
period of three months after termination for any other reason; provided, that no
Option shall be exercisable after the Option's stated expiration date, and
provided further, that if the Optionholder is discharged for Cause (as defined
in Section 2.2(j)(i)) or commits acts detrimental to the Company's interests
after the Service of the Optionholder has been terminated, then the Option will
thereafter be void for all purposes.
(l) Other Plan Provisions Still Applicable. If a Discretionary
Option is exercised upon the termination of Service or death of an Optionholder
under this Section 2.2, the other provisions of the Plan shall still be
applicable to such exercise, including the requirement that the Optionholder or
its successor may be required to enter into a Stock Repurchase Agreement.
(m) Definition of "Service". For purposes of this Plan, unless
it is evidenced otherwise in the option agreement with the Optionholder, the
Optionholder shall be deemed to be in "Service" to the Company so long as such
individual renders continuous services on a periodic basis to the Company (or to
any Parent or Subsidiary Corporation) in the capacity of an employee, director,
or an independent consultant or advisor. In the discretion of a Plan
Administrator, an Optionholder shall be considered to be rendering continuous
services to the Company even if the type of services change, e.g., from employee
to independent consultant. The Optionholder shall be considered to be an
employee for so long as such individual remains in the employ of the Company or
one or more of its Parent or Subsidiary Corporations.
2.3 Terms and Conditions of Stock Awards
(a) Eligibility. All Eligible Persons shall be eligible to
receive Stock Awards. The Plan Administrator of each administered group shall
determine the number of shares of Stock to be awarded from time to time to any
Eligible Person in such group. The grant of a Stock Award to a person (a
"Grantee") shall neither entitle such person to, nor disqualify such person from
participation in, any other grant of options or awards by the Company, whether
under this Plan or under any other stock option or award plan of the Company.
(b) Award for Services Rendered. Stock Awards shall be granted
in recognition of an Eligible Person's services to the Company. The grantee of
any such Stock Award shall not be
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required to pay any consideration to the Company upon receipt of such Stock
Award, except as may be required to satisfy any applicable Arizona corporate
law, employment tax and/or income tax withholding requirements.
(c) Conditions to Award. All Stock Awards shall be subject to
such terms, conditions, restrictions, or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the Company,
or payment by the recipient of any applicable employment or withholding taxes.
Such Plan Administrator may modify or accelerate the termination of the
restrictions applicable to any Stock Award under the circumstances as it deems
appropriate.
(d) Award Agreements. A Plan Administrator may require as a
condition to a Stock Award that the recipient of such Stock Award enter into an
award agreement in such form and content as that Plan Administrator from time to
time approves.
2.4 Terms and Conditions of SARs
(a) Eligibility. All Eligible Persons shall be eligible to
receive SARs. The Plan Administrator of each administered group shall determine
the SARs to be awarded from time to time to any Eligible Person in such group.
The grant of a SAR to a person shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
(b) Award of SARs. Concurrently with or subsequent to the
grant of any Discretionary Option to purchase one or more shares of Stock, a
Plan Administrator may award to the Optionholder with respect to each share of
Stock underlying the Option, a related SAR permitting the Optionholder to be
paid the appreciation on the Stock underlying the Discretionary Option in lieu
of exercising the Option. In addition, a Plan Administrator may award to any
Eligible Person an SAR permitting the Eligible Person to be paid the
appreciation on a designated number of shares of the Stock, whether or not such
shares are actually issued.
(c) Conditions to SAR. All SARs shall be subject to such
terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR Agreements. A Plan Administrator may require as a
condition to the grant of a SAR that the recipient of such SAR enter into a SAR
agreement in such form and content as that Plan Administrator from time to time
approves.
(e) Exercise. An Eligible Person who has been granted a SAR
may exercise such SAR subject to the conditions specified by the Plan
Administrator in the SAR agreement.
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(f) Amount of Payment. The amount of payment to which the
grantee of a SAR shall be entitled upon the exercise of each SAR shall be equal
to the amount, if any, by which the fair market value of the specified shares of
Stock on the exercise date exceeds the fair market value of the specified shares
of Stock on the date the Discretionary Option related to the SAR was granted or
became effective, or, if the SAR is not related to any Option, on the date the
SAR was granted or became effective.
(g) Form of Payment. The SAR may be paid in either cash or
Stock, as determined in the discretion of the applicable Plan Administrator and
set forth in the SAR agreement. If the payment is in Stock, the number of shares
to be paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to Section 2.4(f) by the fair market value of a
share of Stock on the exercise date of such SAR. As soon as practical after
exercise, the Company shall deliver to the SAR grantee a certificate or
certificates for such shares of Stock.
(h) Termination of Employment; Death. Section 2.2(j),
applicable to Incentive Stock Options, and Section 2.2(k), applicable to
nonqualified Options, shall apply equally to SARs issued in tandem with such
Options. Section 2.2(k) shall apply equally to SARs that are not issued in
tandem with any Options.
2.5 Other Cash Awards
(a) In General. The Plan Administrator of each administered
group shall have the discretion to make other awards of cash to Eligible Persons
in such group ("Cash Awards"). Such Cash Awards may relate to existing Options
or to the appreciation in the value of the Stock or other Company securities.
(b) Conditions to Award. All Cash Awards shall be subject to
such terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, and such Plan Administrator may require as a
condition to such Cash Award that the recipient of such Cash Award enter into an
award agreement in such form and content as the Plan Administrator from time to
time approves.
ARTICLE III
Automatic Grant Program
3.1 Eligible Directors under the Automatic Grant Program. The persons
eligible to participate in the Automatic Grant Program shall be limited to Board
members who are not employed by the Company, whether or not such persons are
Non-Employee Directors as defined herein ("Eligible Directors"). Persons who are
eligible under the Automatic Grant Program may also be eligible to receive
Discretionary Options or Discretionary Awards under the Discretionary Grant
Program or option grants or direct stock issuances under other plans of the
Company.
3.2 Terms and Conditions of Automatic Option Grants.
(a) Amount and Date of Grant. During the term of this Plan,
grants of Automatic Options shall be made to each Eligible Director
("Optionholder") as follows:
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(i) Annual Grants. Each year on the Annual Grant Date
an Automatic Option to acquire 4,600 shares of Stock shall be granted to each
Eligible Director for so long as there are shares of Stock available under
Section 1.2 hereof. The "Annual Grant Date" shall be the date of the Company's
annual shareholders meeting commencing as of the first annual meeting occurring
after the Effective Date. Any Eligible Director that was granted an Automatic
Option under Section 3.2(a)(ii) hereof within 90 days of an Annual Grant Date
shall be ineligible to receive an Automatic Option grant pursuant to this
Section 3.2(a)(i) on such Annual Grant Date.
(ii) Initial New Director Grants. On the Initial
Grant Date, every new member of the Board who is an Eligible Director and has
not previously received an Automatic Option grant under this Section 3.2(a)(ii)
shall be granted an Automatic Option to acquire 4,600 shares of Stock ("Optioned
Shares") as long as there are shares of Stock available under Section 1.2
hereof. The "Initial Grant Date" shall be the date that an Eligible Director is
first appointed or elected to the Board. Any Eligible Director that was
previously granted an Automatic Option pursuant to Section 3.2(a)(iii) hereof
shall be ineligible to receive an Automatic Option grant pursuant to this
Section 3.2(a)(ii).
(iii) Initial Existing Director Grants. On the date
on which the Board adopted the Original Plan, each Eligible Director was granted
an Automatic Option to acquire 4,600 shares of Stock.
(b) Exercise Price. The exercise price per share of Stock
subject to each Automatic Option grant shall be equal to 100 percent of the fair
market value per share of the Stock on the date the automatic Option was granted
as determined in accordance with the valuation provisions of Section 4.5 hereof
(the "Option Price").
(c) Vesting. Each Automatic Option grant shall become
exercisable and vest on the earlier of (i) the first anniversary of the date of
such grant or (ii) the day before the next Annual Grant Date. Each Automatic
Option shall only vest and become exercisable if the Optionholder has not ceased
serving as a Board member as of such vesting date.
(d) Method of Exercise. In order to exercise an Automatic
Option with respect to any vested Optioned Shares, an Optionholder (or in the
case of an exercise after an Optionholder's death, such Optionholder's executor,
administrator, heir or legatee, as the case may be) must take the following
action:
(i) execute and deliver to the Company a written
notice of exercise signed in writing by the person exercising the Automatic
Option specifying the number of shares of Stock with respect to which the
Automatic Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 3.2(e) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Automatic Option (if other than the
Optionholder) has the right to exercise such Option.
As soon as practicable after the Exercise Date, the Company shall mail or
deliver to or on behalf of the Optionholder (or any other person or persons
exercising the Automatic Option in accordance herewith)
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a certificate or certificates representing the Stock for which the Automatic
Option has been exercised in accordance with the provisions of this Plan. In no
event may any Automatic Option be exercised for any fractional shares.
(e) Payment of Option Price. The aggregate Option Price shall
be payable in one of the alternative forms specified below:
(i) full payment in cash or check made payable to the
Company's order; or
(ii) full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
(iii) if a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
(f) Term of Option. Each Automatic Option shall expire on the
tenth anniversary of the date on which an Automatic Option grant was made
("Expiration Date"). Except as provided in Article IV hereof, should an
Optionholder's service as a Board member cease prior to the Expiration Date for
any reason while an Automatic Option remains outstanding and unexercised, then
the Automatic Option term shall immediately be modified and the Automatic Option
shall terminate and cease to be outstanding in accordance with the following
provisions:
(i) The Automatic Option shall immediately terminate
and cease to be outstanding for any Optioned Shares which were not vested at the
time of the Optionholder's cessation of Board service.
(ii) Should an Optionholder cease, for any reason
other than death, to serve as a member of the Board, then the Optionholder shall
have 90 days measured from the date of such cessation of Board service in which
to exercise the Automatic Options which vested prior to the time of such
cessation of Board service. In no event, however, may any Automatic Option be
exercised after the Expiration Date of such Automatic Option.
(iii) Should an Optionholder die while serving as a
Board member or within 90 days after cessation of Board service, then the
personal representative of the Optionholder's estate (or the person or persons
to whom the Automatic Option is transferred pursuant to the Optionholder's will
or in accordance with the laws of descent and distribution) shall have a 90 day
period measured from the date of the Optionholder's cessation of Board service
in which to exercise the Automatic Options which vested prior to the time of
such cessation of Board service. In no event, however, may any Automatic Option
be exercised after the Expiration Date of such Automatic Option.
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3.3 Terms and Conditions of Automatic Awards.
(a) Amount and Date of Award. During the term of this Plan,
Automatic Awards shall be made to each Eligible Director ("Grantee") as follows:
(i) Initial New Director Awards. On an Initial Grant
Date, every new member of the Board who is an Eligible Director and has not
previously received an Automatic Award under this Section 3.3(a)(i) shall be
awarded 1,532 shares of Stock as long as there are shares of Stock available
under Section 1.2 hereof. Any Eligible Director that was previously awarded an
Automatic Award pursuant to Section 3.3(a)(ii) hereof shall be ineligible to
receive an award pursuant to this Section 3.3(a)(i).
(ii) Initial Existing Director Awards. On the date on
which the Board adopted the Original Plan, each Eligible Director was awarded
1,532 shares of Stock.
(b) Vesting. Each Automatic Award may not be sold,
transferred, pledged, assigned or otherwise alienated until the earlier of (i)
the first anniversary of the date of the Automatic Award or (ii) the day before
the next Annual Grant Date (the "Vesting Date"). If an Eligible Director ceases
serving as a Board member on or before the Vesting Date or did not attend 75
percent of the scheduled Board meetings (including scheduled meetings of any
committee of the Board of which the Eligible Director is a member) during the
period beginning on the grant date of the Automatic Award and ending on the
Vesting Date, the Automatic Award shall be automatically forfeited and the
awarded Stock shall be returned to the Company.
(c) Terms and Conditions. Upon acceptance of an Automatic
Award, each Grantee (i) shall pay to the Company an amount equal to the par
value of the shares of Stock comprising such Automatic Award and (ii) agrees to
the terms and conditions of such Automatic Award as set forth herein. The
Company shall place a restrictive legend on the shares of Stock awarded to a
Grantee pursuant to an Automatic Award.
ARTICLE IV
Miscellaneous
4.1 Capital Adjustments. The aggregate number of shares of Stock
subject to the Plan, the number of shares of Stock covered by outstanding
Options and Awards and the price per share stated in such Options and Awards,
and the number of shares of Stock covered by unissued Automatic Options and
Automatic Awards, shall be proportionately adjusted for any increase or decrease
in the number of outstanding shares of Stock of the Company resulting from a
subdivision or consolidation of shares or any other capital adjustment or the
payment of a stock dividend or any other increase or decrease in the number of
such shares effected without the Company's receipt of consideration therefor in
money, services or property.
4.2 Mergers, Etc. If the Company is the surviving corporation in any
merger or consolidation (not including a Corporate Transaction), any Option or
Award granted under the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Stock subject to the Option or Award
would have been entitled prior to the merger or consolidation. Except as
provided in
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Section 4.3 hereof, a dissolution or liquidation of the Company shall cause
every Option or Award outstanding hereunder to terminate.
4.3 Corporate Transaction. In the event of shareholder approval of a
Corporate Transaction, (a) all unvested Automatic Options shall automatically
accelerate and immediately vest so that each outstanding Automatic Option shall,
one week prior to the specified effective date for the Corporate Transaction,
become fully exercisable for all of the Optioned Shares and (b) the Plan
Administrator shall have the discretion and authority, exercisable at any time,
to provide for the automatic acceleration of one or more of the outstanding
Discretionary Options or Discretionary Awards granted by it under the Plan. Upon
the consummation of the Corporate Transaction, all Options shall, to the extent
not previously exercised, terminate and cease to be outstanding.
4.4 Change in Control.
(a) Automatic Grant Program. In the event of a Change in
Control, all unvested Automatic Options shall automatically accelerate and
immediately vest so that each outstanding Automatic Option shall, immediately
prior to the effective date of such Change in Control, become fully exercisable
for all of the Optioned Shares. Thereafter, each Automatic Option shall remain
exercisable until the Expiration Date of such Automatic Option.
(b) Discretionary Grant Program. In the event of a Change in
Control, a Plan Administrator shall have the discretion and authority,
exercisable at any time, whether before or after the Change in Control, to
provide for the automatic acceleration of one or more outstanding Discretionary
Options or Discretionary Awards granted by it under the Plan upon the occurrence
of such Change in Control. A Plan Administrator may also impose limitations upon
the automatic acceleration of such Options or Awards to the extent it deems
appropriate. Any Options or Awards accelerated upon a Change in Control will
remain fully exercisable until the expiration or sooner termination of the
Option term.
(c) Incentive Stock Option Limits. The exercisability of any
Discretionary Options which are intended to qualify as Incentive Stock Options
and which are accelerated by the Plan Administrator in connection with a pending
Corporation Transaction or Change in Control shall, except as otherwise provided
in the discretion of the Plan Administrator and the Optionholder, remain subject
to the $100,000 Limitation and vest as quickly as possible without violating the
$100,000 Limitation.
4.5 Calculation of Fair Market Value of Stock. The fair market value of
a share of Stock on any relevant date shall be determined in accordance with the
following provisions:
(a) If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market, the
fair market value shall be the mean between the highest bid and lowest asked
prices (or, if such information is available, the closing selling price) per
share of Stock on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its Nasdaq system or any successor system. If there are no reported bid and
asked prices (or closing selling price) for the Stock on the date in question,
then the mean between the highest bid price and lowest asked price (or the
closing selling price) on the last preceding date for which such quotations
exist shall be determinative of fair market value.
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(b) If the Stock is at the time listed or admitted to trading
on any stock exchange, then the fair market value shall be the closing selling
price per share of Stock on the date in question on the stock exchange
determined by the Board to be the primary market for the Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no reported sale of Stock on such exchange on the date in question,
then the fair market value shall be the closing selling price on the exchange on
the last preceding date for which such quotation exists.
(c) If the Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate, including one or more
independent professional appraisals.
4.6 Use of Proceeds. The proceeds received by the Company from the sale
of Stock pursuant to the exercise of Options or Awards hereunder, if any, shall
be used for general corporate purposes.
4.7 Cancellation of Options. Each Plan Administrator shall have the
authority to effect, at any time and from time to time, with the consent of the
affected Optionholders, the cancellation of any or all outstanding Discretionary
Options granted under the Plan by that Plan Administrator and to grant in
substitution therefore new Discretionary Options under the Plan covering the
same or different numbers of shares of Stock as long as such new Discretionary
Options have an exercise price per share of Stock no less than the minimum
exercise price as set forth in Section 2.2(b) hereof on the new grant date.
4.8 Regulatory Approvals. The implementation of the Plan, the granting
of any Option or Award hereunder, and the issuance of Stock upon the exercise of
any such Option or Award shall be subject to the procurement by the Company of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the Options or Awards granted under it and the Stock issued
pursuant to it.
4.9 Indemnification. In addition to such other rights of
indemnification as they may have, the members of a Plan Administrator shall be
indemnified and held harmless by the Company, to the extent permitted under
applicable law, for, from and against all costs and expenses reasonably incurred
by them in connection with any action, legal proceeding to which any member
thereof may be a party by reason of any action taken, failure to act under or in
connection with the Plan or any rights granted thereunder and against all
amounts paid by them in settlement thereof or paid by them in satisfaction of a
judgment of any such action, suit or proceeding, except a judgment based upon a
finding of bad faith.
4.10 Plan Not Exclusive. This Plan is not intended to be the exclusive
means by which the Company may issue options or warrants to acquire its Stock,
stock awards or any other type of award. To the extent permitted by applicable
law, any such other option, warrants or awards may be issued by the Company
other than pursuant to this Plan without shareholder approval.
4.11 Company Rights. The grants of Options shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
4.12 Privilege of Stock Ownership. An Optionholder shall not have any
of the rights of a shareholder with respect to Optioned Shares until such
individual shall have exercised the Option and paid
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the Option Price for the Optioned Shares. No adjustment will be made for
dividends or other rights for which the record date is prior to the date of such
exercise and full payment for the Optioned Shares.
4.13 Assignment. The right to acquire Stock or other assets under the
Plan may not be assigned, encumbered or otherwise transferred by any
Optionholder except as specifically provided herein. Except as specifically
allowed by the Plan Administrator at the time of grant and as set forth in the
documents evidencing a Discretionary Option or Award, no Option or Award granted
under the Plan or any of the rights and privileges conferred thereby shall be
assignable or transferable by an Optionholder or grantee other than by will or
the laws of descent and distribution, and such Option or Award shall be
exercisable during the Optionholder's or grantee's lifetime only by the
Optionholder or grantee. The provisions of the Plan shall inure to the benefit
of, and be binding upon, the Company and its successors or assigns, and the
Optionholders, the legal representatives of their respective estates, their
respective heirs or legatees and their permitted assignees.
4.14 Securities Restrictions
(a) Legend on Certificates. All certificates representing
shares of Stock issued under the Plan shall be endorsed with a legend reading as
follows:
The shares of Common Stock evidenced by this
certificate have been issued to the
registered owner in reliance upon written
representations that these shares have been
purchased solely for investment. These shares
may not be sold, transferred or assigned
unless in the opinion of the Company and its
legal counsel such sale, transfer or
assignment will not be in violation of the
Securities Act of 1933, as amended, and the
rules and regulations thereunder.
(b) Private Offering for Investment Only. The Options and
Awards are and shall be made available only to a limited number of present and
future key personnel and their permitted transferees who have knowledge of the
Company's financial condition, management and its affairs. The Plan is not
intended to provide additional capital for the Company, but to encourage
ownership of Stock among the Company's key personnel or their permitted
transferees. By the act of accepting an Option or Award, each grantee or
permitted transferee agrees (i) that, any shares of Stock acquired will be
solely for investment and not with any intention to resell or redistribute those
shares and (ii) such intention will be confirmed by an appropriate certificate
at the time the Stock is acquired if requested by the Company. The neglect or
failure to execute such a certificate, however, shall not limit or negate the
foregoing agreement.
(c) Registration Statement. If a Registration Statement
covering the shares of Stock issuable under the Plan is filed under the
Securities Act of 1933, as amended, and is declared effective by the Securities
Exchange Commission, the provisions of Sections 4.14(a) and (b) shall terminate
during the period of time that such Registration Statement, as periodically
amended, remains effective.
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4.15 Tax Withholding.
(a) General. The Company's obligation to deliver Stock under
the Plan shall be subject to the satisfaction of all applicable federal, state
and local income tax withholding requirements.
(b) Shares to Pay for Withholding. The Board may, in its
discretion and in accordance with the provisions of this Section 4.15(b) and
such supplemental rules as it may from time to time adopt, provide any or all
Optionholders or Grantees with the right to use shares of Stock in satisfaction
of all or part of the federal, state and local income tax liabilities incurred
by such Optionholders or Grantees in connection with the receipt of Stock
("Taxes"). Such right may be provided to any such Optionholder or Grantee in
either or both of the following formats:
(i) Stock Withholding. An Optionholder or Grantee may
be provided with the election, which may be subject to approval by the Plan
Administrator, to have the Company withhold, from the Stock otherwise issuable,
a portion of those shares of Stock with an aggregate fair market value equal to
the percentage (not to exceed 100 percent) of the applicable Taxes designated by
the Optionholder or Grantee.
(ii) Stock Delivery. The Board may, in its
discretion, provide the Optionholder or Grantee with the election to deliver to
the Company, at the time the Option is exercised or Stock is awarded, one or
more shares of Stock previously acquired by such individual (other than pursuant
to the transaction triggering the Taxes) with an aggregate fair market value
equal to the percentage (not to exceed 100 percent) of the taxes incurred in
connection with such Option exercise or Stock Award designated by the
Optionholder or Grantee.
4.16 Governing Law. The Plan shall be governed by and all questions
hereunder shall be determined in accordance with the laws of the State of
Arizona.
ARTICLE V
Definitions
The following capitalized terms used in this Plan shall have the
meaning described below:
"Affiliates" shall mean all "officers" (as that term is defined in Rule
16a-1(f) promulgated under the 1934 Act) and directors of the Company and all
persons who own ten percent or more of the Company's issued and outstanding
Stock.
"Annual Grant Date" shall mean the date of the Company's annual
shareholder meeting.
"Automatic Awards" shall mean an automatic grant of Stock made to
Eligible Directors under the Automatic Grant Program on the Initial Grant Date
and on the date on which the Board adopted the Original Plan.
"Automatic Grant Program" shall mean that program set forth in Article
III of this Plan pursuant to which non-employee members of the Board are
automatically granted Options upon certain events.
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"Automatic Option Grant" shall mean those automatic option grants made
on the Annual Grant Date, on the Initial Grant Date, and on the date on which
the Board adopted the Original Plan.
"Automatic Options" shall mean those Options granted pursuant to the
Automatic Grant Program.
"Awards" shall mean the Discretionary Awards and the Automatic Awards.
"Board" shall mean the Board of Directors of the Company.
"Cash Award" shall mean an award to be paid in cash and granted under
Section 2.5 hereunder.
"Change in Control" shall mean and include the following transactions
or situations:
(i) A sale, transfer, or other disposition by the Company
through a single transaction or a series of transactions of securities of the
Company representing 30 percent or more of the combined voting power of the
Company's then outstanding securities to any "Unrelated Person" or "Unrelated
Persons" acting in concert with one another. For purposes of this definition,
the term "Person" shall mean and include any individual, partnership, joint
venture, association, trust corporation, or other entity (including a "group" as
referred to in Section 13(d)(3) of the 1934 Act). For purposes of this
definition, the term "Unrelated Person" shall mean and include any Person other
than the Company, a wholly-owned subsidiary of the Company, or an employee
benefit plan of the Company.
(ii) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(iii) A change in the ownership of the Company through a
single transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing at
least 30 percent of the combined voting power of the Company's then outstanding
securities. For purposes of this definition, the term "Beneficial Owner" shall
have the same meaning as given to that term in Rule 13d-3 promulgated under the
1934 Act, provided that any pledgee of voting securities shall not be deemed to
be the Beneficial Owner thereof prior to its acquisition of voting rights with
respect to such securities.
(iv) Any consolidation or merger of the Company with or into
an Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the Beneficial Owners of securities of the surviving
corporation representing at least 50 percent of the combined voting power of the
surviving corporation's then outstanding securities.
(v) During any period of two years, individuals who, at the
beginning of such period, constituted the Board of Directors of the Company
cease, for any reason, to constitute at least a majority thereof, unless the
election or nomination for election of each new director was approved by the
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period.
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(vi) A change in control of the Company of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the 1934 Act, or any successor regulation of
similar import, regardless of whether the Company is subject to such reporting
requirement.
Notwithstanding any provision hereof to the contrary, the filing of a
proceeding for the reorganization of the Company under Chapter 11 of the General
Bankruptcy Code or any successor or other statute of similar import shall not be
deemed to be a Change of Control for purposes of this Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean Gateway Data Sciences Corporation, an Arizona
corporation.
"Corporate Transaction" shall mean (a) a merger or consolidation in
which the Company is not the surviving entity, except for a transaction the
principal purposes of which is to change the state in which the Company is
incorporated; (b) the sale, transfer of or other disposition of all or
substantially all of the assets of the Company and complete liquidation or
dissolution of the Company, or (c) any reverse merger in which the Company is
the surviving entity but in which the securities possessing more than 50 percent
of the total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger.
"Discretionary Award" shall mean a Stock Award, SAR or Cash Award under
the Discretionary Grant Program.
"Discretionary Grant Program" shall mean the program described in
Article II of this Plan pursuant to which certain Eligible Persons are granted
Options or Awards in the discretion of the Plan Administrator.
"Discretionary Options" shall mean options granted under the
Discretionary Grant Program.
"Effective Date" shall mean February 15, 1996, the date that the First
Revised Plan was approved by the Company's shareholders.
"Eligible Directors" shall mean, with respect to the Automatic Grant
Program, those Board members who are not employed by the Company, whether or not
such members are Non-Employee Directors as defined herein.
"Eligible Persons" shall mean, (a) with respect to the Discretionary
Grant Program, those persons who, at the time that the Discretionary Option or
Discretionary Award is granted, are (i) key personnel (including officers and
directors) of the Company or Parent or Subsidiary Corporations, or (ii)
consultants or independent contractors who provide valuable services to the
Company or Parent or Subsidiary Corporations, and (b) with respect to the
Automatic Grant Program, the Eligible Directors.
"Employee Committee" shall mean that committee appointed by the Board
to administer the Plan with respect to the Non-Affiliates and comprised of one
or more persons who are members of the Board.
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"Exercise Date" shall be the date on which written notice of the
exercise of an Option and payment of the Option Price is delivered to the
Company in accordance with the requirements of the Plan.
"Expiration Date" shall be the 10-year anniversary of the date on which
an Automatic Option Grant was made.
"Grantee" shall mean an Eligible Person or Eligible Director that has
received an Award.
"Incentive Stock Option" shall mean a Discretionary Option that is
intended to qualify as an "incentive stock option" under Code section 422.
"Initial Grant Date" shall mean the date that an Eligible Director is
first appointed or elected to the Board.
"Non-Affiliates" shall mean all persons who are not Affiliates.
"Non-Employee Directors" shall mean those directors of the Company who
satisfy the definition of "Non-Employee Directors" under Rule 16b-3(b)(3)(i)
promulgated under the 1934 Act.
"$100,000 Limitation" shall mean the limitation pursuant to which the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or any Parent or Subsidiary
Corporation) may for the first time be exercisable as Incentive Stock Options
during any one calendar year shall not exceed the sum of $100,000.
"Optionholder" shall mean an Eligible Person or Eligible Director to
whom Options have been granted.
"Optioned Shares" shall be those shares of Stock to be optioned from
time to time to any Eligible Person or Eligible Directors.
"Option Price" shall mean (i) with respect to Discretionary Options,
the exercise price per share as specified by the Plan Administrator pursuant to
Section 2.2(b) hereof, and (ii) with respect to Automatic Options, the exercise
price per share as specified by Section 3.2(b) hereof.
"Options" shall mean options to acquire Stock granted under the Plan.
"Parent Corporation" shall mean any corporation in the unbroken chain
of corporations ending with the employer corporation, where, at each link of the
chain, the corporation and the link above owns at least 50 percent of the
combined total voting power of all classes of the stock in the corporation in
the link below.
"Plan" shall mean this stock option plan for Gateway Data Sciences
Corporation.
"Plan Administrator" shall mean (a) either the Board, the Senior
Committee, or any other committee, whichever is applicable, with respect to the
administration of the Discretionary Grant Program as it relates to Affiliates
and (b) either the Board, the Employee Committee, or any other committee,
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whichever is applicable, with respect to the administration of the Discretionary
Grant Program as it relates to Non-Affiliates.
"SAR" shall mean stock appreciation rights granted pursuant to Section
2.4 hereof.
"Senior Committee" shall mean that committee appointed by the Board to
administer the Discretionary Grant Program with respect to the Affiliates and
comprised of two or more Non-Employee Directors.
"Service" shall have the meaning set forth in Section 2.2(n) hereof.
"Stock" shall mean shares of the Company's common stock, $.01 par value
per share, which may be unissued or treasury shares, as the Board may from time
to time determine.
"Stock Awards" shall mean Stock directly granted under the
Discretionary Grant Program.
"Subsidiary Corporation" shall mean any corporation in the unbroken
chain of corporations starting with the employer corporation, where, at each
link of the chain, the corporation and the link above owns at least 50 percent
of the combined voting power of all classes of stock in the corporation below.
EXECUTED as of the 6th day of December, 1996.
GATEWAY DATA SCIENCES
CORPORATION
By: /s/ Michael M. Gordon
-------------------------------------
Name: Michael M. Gordon
Its: President
ATTESTED BY:
/s/ Matthew J. Gordon
- ----------------------------
Secretary
21
GATEWAY DATA SCIENCES CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
(as amended through December 6, 1996)
ARTICLE I
PURPOSE
1.1 Name. This Stock Purchase Plan shall be known as the
Employee Stock Purchase Plan (the "Plan") and is dated as of February 15, 1996.
1.2 Purpose. The Plan is intended to provide a method whereby
employees of Gateway Data Sciences Corporation, an Arizona corporation (the
"Company"), and one or more of its Corporate Affiliates will have an opportunity
to acquire a proprietary interest in the Company through the purchase of shares
of the Common Stock of the Company.
1.3 Qualification. It is the intention of the Company to have
the Plan qualify as an "employee stock purchase plan" under section 423 of the
Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the
Plan shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
1.4 Definitions. Capitalized terms used in this Agreement are
defined in Article X.
ARTICLE II
ADMINISTRATION
The Plan shall be administered by a committee (the "Plan
Administrator") comprised of two or more non-employee Board members appointed
from time to time by the Board. The Plan Administrator shall have full authority
to administer the Plan, including authority to interpret and construe any
provision of the Plan and to adopt such rules and regulations for administering
the Plan as it may deem necessary in order to comply with the requirements of
Section 423 of the Code. Decisions of the Plan Administrator shall be final and
binding on all parties who have an interest in the Plan. The Board of Directors
may from time to time appoint members of the Committee in substitution for or in
addition to members previously appointed and may fill vacancies, however caused,
in the Committee. The Committee may select one of its members as its Chairman
and shall hold its meetings at such times and places as it shall deem advisable
and may hold telephonic meetings. A majority of its members shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members. The Committee may correct any defect or omission or reconcile any
inconsistency in the Plan, in the manner and to the extent it shall deem
desirable. Any decision or determination reduced to writing and signed by a
majority of the members of the Committee shall be as fully effective as if it
had been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary and shall make such rules and regulations for
the conduct of its business as it shall deem advisable.
<PAGE>
ARTICLE III
OFFERING PERIODS
3.1 General. Shares of Common Stock shall be offered for
purchase under the Plan through a series of successive offering periods (each,
an "Offering Period"), each to be of a duration of 24 months or less as
designated by the Plan Administrator prior to the start date until such time as
(a) the maximum number of shares of Common Stock available for issuance under
the Plan shall have been purchased or (b) the Plan shall have been sooner
terminated in accordance with Article VIII. The initial Offering Period shall
commence upon that date specified by the Board, which date must occur after the
first date that any equity security of the Company becomes registered under
Section 12 of the Securities Exchange Act of 1934. After the termination of the
initial Offering Period, successive Offering Periods shall commence as
designated by the Plan Administrator.
3.2 Shareholder Approval. Under no circumstances shall any
Offering Period commence under the Plan, nor shall any shares of Common Stock be
issued hereunder, until such time as (a) the Plan shall have been approved by
the Company's shareholders and (b) the Company shall have complied with all
applicable requirements of the Securities Act of 1933 (as amended), all
applicable listing requirements of any securities exchange or trading market on
which shares of the Common Stock are listed and all other applicable statutory
and regulatory requirements.
3.3 Purchase Rights. Each Participant shall be granted a
separate purchase right for each Offering Period in which he/she participates.
The purchase right shall be granted on the Entry Date on which such individual
first joins the Offering Period in effect under the Plan and shall be
automatically exercised in successive semi-annual installments on the last
business day of December and June of each year. Accordingly, each purchase right
may be exercised up to two times each calendar year it remains outstanding.
3.4 No Obligation for Successive Period. The acquisition of
Common Stock pursuant to this Plan for any Offering Period shall neither limit
nor require the acquisition of Common Stock by the Participant in any subsequent
Offering Period.
ARTICLE IV
ELIGIBILITY AND PARTICIPATION
4.1 Employee Eligibility. Each Eligible Employee of a
Participating Company shall be eligible to participate in the Plan in accordance
with the following provisions:
(a) Eligible Employee with 30 Days of Service on
Start Date. An individual who is an Eligible Employee with at least 30 days of
Service prior to the Start Date of the Offering Period may enter that Offering
Period on such Start Date, provided he/she enrolls in the Offering Period on or
before such date in accordance with Section 4.2 below.
2
<PAGE>
That Start Date shall then become such individual's Entry Date for the Offering
Period, and on that date such individual shall be granted his/her purchase right
for the Offering Period. Should any such Eligible Employee not enter the
Offering Period on the Start Date, then he/she may not subsequently join that
particular Offering Period on any later date.
(b) Eligible Employee without 30 Days of Service on
Start Date. An individual who is an Eligible Employee with less than 30 days of
Service on the Start Date of any Offering Period may subsequently enter that
Offering Period on the first Semi-Annual Entry Date on which he/she is an
Eligible Employee with at least thirty (30) days of Service, provided he/she
enrolls in the Offering Period on or before such Semi-Annual Entry Date in
accordance with Section 4.2 below. That Semi-Annual Entry Date shall then become
such individual's Entry Date for the Offering Period, and on that date such
individual shall be granted his/her purchase right for the Offering Period.
Should such an Eligible Employee not enter the Offering Period on the first
Semi-Annual Entry Date on which he/she is eligible to join the Offering Period,
then he/she may not subsequently join that particular Offering Period on any
later date.
4.2 Enrollment. To participate for a particular Offering
Period, the Eligible Employee must complete the enrollment forms prescribed by
the Plan Administrator (including a purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his/her scheduled Entry Date.
4.3 Payroll Deduction Amount. The payroll deduction authorized
by the Participant for purposes of acquiring shares of Common Stock under the
Plan may be any multiple of one percent of the Earnings paid to the Participant
during each Semi-Annual Period of Participation within the Offering Period, up
to a maximum of 10 percent. The deduction rate so authorized shall continue in
effect for the remainder of the Offering Period, except to the extent such rate
is changed in accordance with the following guidelines:
(a) Reductions During Period. Any Participant may, at
any time during a Semi-Annual Period of Participation, reduce his/her rate of
payroll deduction. Such reduction shall become effective as soon as possible
after filing of the requisite reduction form with the Plan Administrator (or its
designate), but the Participant may not effect more than one such reduction
during the same Semi-Annual Period of Participation.
(b) Increases/Decreases for Subsequent Periods. Any
Participant may, prior to the commencement of any new Semi-Annual Period of
Participation within the Offering Period, increase or decrease the rate of
his/her payroll deduction by filing the appropriate form with the Plan
Administrator (or its designate). The new rate shall become effective as of the
first date of the first Semi-Annual Period of Participation following the filing
of such form.
3
<PAGE>
4.4 Termination of Payroll Deductions. Payroll deductions will
automatically cease upon the termination of the Participant's purchase right in
accordance with the applicable provisions of Article VI below.
ARTICLE V
STOCK SUBJECT TO PLAN
5.1 Shares Available. The Common Stock purchasable under the
Plan shall, solely in the discretion of the Plan Administrator, be made
available from either authorized but unissued shares of Common Stock or from
shares of Common Stock reacquired by the Company, including shares of Common
Stock purchased on the open market. The total number of shares which may be
issued over the term of the Plan shall not exceed 200,000 shares (subject to
adjustment under Section 5.2 below).
5.2 Adjustments. In the event any change is made to the
outstanding Common Stock by reason of any stock dividend, stock split,
combination of shares or other change affecting such outstanding Common Stock as
a class without the Company's receipt of consideration, appropriate adjustments
shall be made by the Plan Administrator to (a) the class and maximum number of
securities issuable over the term of the Plan, (b) the class and maximum number
of securities purchasable per Participant during any one Semi-Annual Period of
Participation, and (c) the class and number of securities and the price per
share in effect under each purchase right at the time outstanding under the
Plan. Such adjustments shall be designed to preclude the dilution or enlargement
of rights and benefits under the Plan.
ARTICLE VI
PURCHASE RIGHTS
6.1 Purchase Right. An Eligible Employee who participates in
the Plan for a particular Offering Period shall have the right to purchase
shares of Common Stock, in a series of successive semi-annual installments
during such Offering Period, upon the terms and conditions set forth below and
shall execute a purchase agreement embodying such terms and conditions and such
other provisions (not inconsistent with the Plan) as the Plan Administrator may
deem advisable.
6.2 Purchase Price. Common Stock shall be issuable at the end
of each SemiAnnual Period of Participation within the Offering Period at a
purchase price equal to 85 percent of the lower of (a) the fair market value per
share on the Participant's Entry Date into that Offering Period or (b) the fair
market value per share on the Semi-Annual Purchase Date on which such
Semi-Annual Period of Participation ends. However, for each Participant whose
Entry Date is other than the Start Date of the Offering Period, the clause (a)
amount shall in no event be less than the fair market value of the Common Stock
on the Start Date of that Offering Period.
4
<PAGE>
6.3 Calculation of Fair Market Value of Common Stock. The fair
market value of a share of Common Stock on any relevant date shall be determined
in accordance with the following provisions:
(a) If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded in the over-the-counter
market, the fair market value shall be the mean between the highest bid and
lowest asked prices (or, if such information is available, the closing selling
price) per share of Common Stock on the date in question in the over-the-counter
market, as such prices are reported by the National Association of Securities
Dealers through its Nasdaq system or any successor system. If there are no
reported bid and asked prices (or closing selling price) for the Common Stock on
the date in question, then the mean between the highest bid price and lowest
asked price (or the closing selling price) on the last preceding date for which
such quotations exist shall be determinative of fair market value.
(b) If the Common Stock is at the time listed or
admitted to trading on any stock exchange, then the fair market value shall be
the closing selling price per share of Common Stock on the date in question on
the stock exchange determined by the Board to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no reported sale of Common Stock on
such exchange on the date in question, then the fair market value shall be the
closing selling price on the exchange on the last preceding date for which such
quotation exists.
(c) If the Common Stock at the time is neither listed
nor admitted to trading on any stock exchange nor traded in the over-the-counter
market, then the fair market value shall be determined by the Board after taking
into account such factors as the Board shall deem appropriate, including one or
more independent professional appraisals.
6.4 Number of Purchasable Shares. The number of shares
purchasable per Participant for each Semi-Annual Period of Participation during
the Offering Period shall be the number of whole shares obtained by dividing the
amount collected from the Participant through payroll deductions during that
Semi-Annual Period of Participation by the purchase price in effect for such
period. Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent or more of the total
combined voting power or value of all classes of stock of the Company or any of
its Corporate Affiliates.
6.5 Payment. Payment for the Common Stock purchased under the
Plan shall be effected by means of the Participant's authorized payroll
deductions. Such deductions shall begin with the first full payroll period
beginning with or immediately following the Participant's Entry Date into the
Offering Period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of the
Offering Period. The amounts so collected shall be credited to the Participant's
book account under the
5
<PAGE>
Plan, but no interest shall be paid on the balance from time to time outstanding
in such account. The amounts collected from a Participant may be commingled with
the general assets of the Company and may be used for general corporate
purposes.
6.6 Termination of Purchase Right. The following provisions
shall govern the termination of outstanding purchase rights:
(a) A Participant may, at any time prior to the last
five business days of the Semi-Annual Period of Participation, terminate his/her
outstanding purchase right under the Plan by filing the prescribed notification
form with the Plan Administrator (or its designate). No further payroll
deductions shall be collected from the Participant with respect to the
terminated purchase right, and any payroll deductions collected for the
Semi-Annual Period of Participation in which such termination occurs shall, at
the Participant's election, be immediately refunded or held for the purchase of
shares on the Semi-Annual Purchase Date immediately following such termination.
If no such election is made, then such funds shall be refunded as soon as
possible after the close of such Semi-Annual Period of Participation.
(b) Any Participant may, at any time prior to the end
of any Semi- Annual Period of Participation, terminate his/her outstanding
purchase right under the Plan for the following Semi-Annual Period of
Participation by filing the prescribed notification form with the Plan
Administrator (or its designate).
(c) The termination by a Participant of his/her
purchase rights under either Section 6.6(a) or (b) shall be irrevocable, and the
Participant may not subsequently rejoin the Offering Period for which the
terminated purchase right was granted. In order to resume participation in any
subsequent Offering Period, such individual must re-enroll in the Plan (by
making a timely filing of a new purchase agreement and payroll deduction
authorization) on or before the date he/she is first eligible to join the new
Offering Period.
(d) If the Participant ceases to remain an Eligible
Employee while his/her purchase right remains outstanding, then such purchase
right shall immediately terminate, and the payroll deductions collected from
such Participant for the Semi-Annual Period of Participation in which the
purchase right so terminates shall be promptly refunded to the Participant.
However, in the event the Participant's cessation of Eligible Employee status
occurs by reason of his/her death or permanent disability, then such individual
(or the personal representative of the estate of a deceased Participant) shall
have the following election, exercisable until the end of the Semi-Annual Period
of Participation in which such cessation of Eligible Employee status occurs:
(i) to withdraw all of the Participant's
payroll deductions for such Semi-Annual Period of Participation, or
6
<PAGE>
(ii) to have such funds held for the
purchase of shares on the Semi-Annual Purchase Date immediately following such
cessation of Eligible Employee status.
If no such election is made, then such funds shall be refunded as soon as
possible after the close of such Semi-Annual Period of Participation. In no
event, however, may any payroll deductions be made on the Participant's behalf
following his/her cessation of Eligible Employee status.
6.7 Stock Purchase. Shares of Common Stock shall automatically
be purchased on behalf of each Participant (other than Participants whose
payroll deductions have previously been refunded in accordance with the
Termination of Purchase Right provisions above) on each Semi-Annual Purchase
Date. The purchase shall be effected by applying each Participant's payroll
deductions for the Semi-Annual Period of Participation ending on such
Semi-Annual Purchase Date (together with any carryover deductions from the
preceding SemiAnnual Period of Participation) to the purchase of whole shares of
Common Stock (subject to the limitation on the maximum number of purchasable
shares set forth above) at the purchase price in effect for such Semi-Annual
Period of Participation. Any payroll deductions not applied to such purchase
because they are not sufficient to purchase a whole share shall be held for the
purchase of Common Stock in the next Semi-Annual Period of Participation.
However, any payroll deductions not applied to the purchase of Common Stock by
reason of the limitation on the maximum number of shares purchasable by the
Participant for the Semi-Annual Period of Participation shall be promptly
refunded to the Participant.
6.8 Proration of Purchase Rights. Should the total number of
shares of Common Stock which are to be purchased pursuant to outstanding
purchase rights on any particular date exceed the number of shares then
available for issuance under the Plan, the Plan Administrator shall make a pro
rata allocation of the available shares on a uniform and nondiscriminatory
basis, and the payroll deductions of each Participant, to the extent in excess
of the aggregate purchase price payable for the Common Stock pro-rated to such
individual, shall be refunded to such Participant.
6.9 Rights as Shareholder. A Participant shall have no
shareholder rights with respect to the shares subject to his/her outstanding
purchase right until the shares are actually purchased on the Participant's
behalf in accordance with the applicable provisions of the Plan. No adjustments
shall be made for dividends, distributions or other rights for which the record
date is prior to the date of such purchase. A Participant shall be entitled to
receive, as soon as practicable after each Semi-Annual Purchase Date, a stock
certificate for the number of shares purchased on the Participant's behalf. Such
certificate may, upon the Participant's request, be issued in the names of the
Participant and his/her spouse as community property or as joint tenants with
right of survivorship. Alternatively, the Participant may request the issuance
of such certificate in "street name" for immediate deposit in a designated
brokerage account.
7
<PAGE>
6.10 Assignability. No purchase right granted under the Plan
shall be assignable or transferable by the Participant other than by will or by
the laws of descent and distribution following the Participant's death, and
during the Participant's lifetime the purchase right shall be exercisable only
by the Participant.
6.11 Change in Ownership. Should a Corporate Transaction occur
during the Offering Period, then all outstanding purchase rights under the Plan
shall automatically be exercised immediately prior to the effective date of such
Corporate Transaction by applying the payroll deductions of each Participant for
the Semi-Annual Period of Participation in which such Corporate Transaction
occurs to the purchase of whole shares of Common Stock at 85 percent of the
lower of (i) the fair market value of the Common Stock on the Participant's
Entry Date into the Offering Period in which such Corporate Transaction occurs
or (ii) the fair market value of the Common Stock immediately prior to the
effective date of such Corporate Transaction. However, the applicable share
limitations of Articles VI and VII shall continue to apply to any such purchase,
and the clause (i) amount above shall not, for any Participant whose Entry Date
for the Offering Period is other than the Start Date of that Offering Period, be
less than the fair market value of the Common Stock on such Start Date.
6.12 Notice. The Company shall use its best efforts to provide
at least 10 days advance written notice of the occurrence of any Corporate
Transaction, and Participants shall, following the receipt of such notice, have
the right to terminate their outstanding purchase rights in accordance with the
applicable provisions of this Article VI.
ARTICLE VII
LIMITATION ON PARTICIPATION
7.1 General. No Participant shall be entitled to accrue rights
to acquire Common Stock pursuant to any purchase right outstanding under this
Plan if and to the extent such accrual, when aggregated with (a) rights to
purchase Common Stock accrued under any other purchase right outstanding under
this Plan and (b) similar rights accrued under other employee stock purchase
plans (within the meaning of Section 423 of the Code) of the Company or its
Corporate Affiliates, would otherwise permit such Participant to purchase more
than $25,000 worth of stock of the Company or any Corporate Affiliate
(determined on the basis of the fair market value of such stock on the date or
dates such rights are granted the Participant) for each calendar year such
rights are at any time outstanding.
7.2 Accrual of Rights. For purposes of applying the limitation
set forth in Section 7.1, the right to acquire Common Stock pursuant to each
purchase right outstanding under the Plan shall accrue as follows:
(a) The right to acquire Common Stock under each such
purchase right shall accrue in a series of successive semi-annual installments
as and when the purchase right
8
<PAGE>
first becomes exercisable for each such installment on the last business day of
each Semi-Annual Period of Participation for which the right remains
outstanding.
(b) No right to acquire Common Stock under any
outstanding purchase right shall accrue to the extent the Participant has
already accrued in the same calendar year the right to acquire $25,000 worth of
Common Stock (determined on the basis of the fair market value on the date or
dates of grant) pursuant to one or more purchase rights held by the Participant
during such calendar year.
(c) If by reason of such limitation, any purchase
right of a Participant does not accrue for a particular Semi-Annual Period of
Participation, then the payroll deductions which the Participant made during
that Semi-Annual Period of Participation with respect to such purchase right
shall be promptly refunded.
7.3 Priority. In the event there is any conflict between the
provisions of this Article VII and one or more provisions of the Plan or any
instrument issued thereunder, the provisions of this Article VII shall be
controlling.
ARTICLE VIII
AMENDMENT AND TERMINATION
8.1 Amendments. The Board may alter, amend, suspend or
discontinue the Plan following the close of any Semi-Annual Period of
Participation. However, the Board may not, without the approval of the Company's
shareholders:
(a) materially increase the number of shares issuable
under the Plan or the maximum number of shares purchasable per Participant
during any one Semi-Annual Period of Participation, except that the Plan
Administrator shall have the authority, exercisable without such shareholder
approval, to effect adjustments to the extent necessary to reflect changes in
the Company's capital structure pursuant to Section 6.2;
(b) alter the purchase price formula so as to reduce
the purchase price payable for the shares issuable under the Plan; or
(c) materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility to participate in the Plan.
8.2 Termination. The Company shall have the right, exercisable
in the sole discretion of the Plan Administrator, to terminate all outstanding
purchase rights under the Plan immediately following the close of any
Semi-Annual Period of Participation. Should the Company elect to exercise such
right, then the Plan shall terminate in its entirety. No further purchase rights
shall thereafter be granted or exercised, and no further payroll deductions
shall thereafter be collected, under the Plan.
9
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
9.1 Plan Commencement. The Plan shall commence upon having
been approved by the shareholders. In the event such shareholder approval is not
obtained, or such Company compliance is not affected, within 12 months after the
date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect.
9.2 Termination. The Plan shall terminate upon the earlier of
(a) the tenth anniversary of the date of this Plan or (b) the date on which all
shares available for issuance under the Plan shall have been sold pursuant to
purchase rights exercised under the Plan.
9.3 Costs. All costs and expenses incurred in the
administration of the Plan shall be paid by the Company.
9.4 No Employment Rights. Neither the action of the Company in
establishing the Plan, nor any action taken under the Plan by the Board or the
Plan Administrator, nor any provision of the Plan itself shall be construed so
as to grant any person the right to remain in the employ of the Company or any
of its Corporate Affiliates for any period of specific duration, and such
person's employment may be terminated at any time, with or without cause.
9.5 Conflict of Laws. The provisions of the Plan shall be
governed by the laws of the State of Arizona without resort to that State's
conflict-of-laws rules.
ARTICLE X
DEFINITIONS
For purposes of administration of the Plan, the following
terms shall have the meanings indicated:
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Company" means Gateway Data Sciences Corporation, an Arizona
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Gateway Data Sciences Corporation which shall by
appropriate action adopt the Plan.
"Common Stock" means shares of the Company's common stock, par
value $0.01 per share.
10
<PAGE>
"Corporate Affiliate" means any parent or subsidiary
corporation of the Company (as determined in accordance with Code Section 424)
which is incorporated in the United States, including any parent or subsidiary
corporation which becomes such after the Effective Date.
"Corporate Transaction" means
(a) a merger or other reorganization in which the
Company will not be the surviving corporation (other than a reorganization
effected primarily to change the State in which the company is incorporated),
(b) a sale of all or substantially all of the
Company's assets in liquidation or dissolution of the Company, or
(c) a reverse merger in which the Company is the
surviving corporation but in which more than 50 percent of the Company's
outstanding voting stock is transferred to a person or persons different from
those who held the stock immediately prior to such merger.
"Earnings" means the sum of the following items of
compensation paid to a Participant by one or more Participating Companies during
such individual's period of participation in the Plan: (a) regular base salary
or earnings, plus (b) all overtime payments, bonuses, commissions,
profit-sharing distributions and other incentive-type payments. There shall,
however, be excluded from the calculation of such Earnings any and all
contributions (other than Code Section 401(k) or Code Section 125 contributions)
made on the Participant's behalf by the Company or one or more Corporate
Affiliates under any employee benefit or welfare plan now or hereafter
established.
"Effective Date" means the first day of the initial Offering
Period which shall commence upon that date specified by the Board and which
occurs after the first date that any equity security of the Company becomes
registered under Section 12 of the Securities Exchange Act of 1934. However, for
any Corporate Affiliate which becomes a Participating Company in the Plan after
the first day of the initial Offering Period, a subsequent Effective Date shall
be designated with respect to participation by its Eligible Employees.
"Eligible Employee" means any person who is engaged, on a
regularly-scheduled basis of more than 20 hours per week for more than five
months per calendar year, in the rendition of personal services to the Company
or any other Participating Company for earnings considered wages under Section
3121(a) of the Code.
"Entry Date" means the date an Eligible Employee first joins
the Offering Period in effect under the Plan. The earliest Entry Date under the
Plan shall be the Effective Date.
"Offering Period" means the designated period as specified in
Section 3.1 hereof.
11
<PAGE>
"Participant" means any Eligible Employee of a Participating
Company who is actively participating in the Plan.
"Participating Company" means the Company, all Corporate
Affiliates listed in Schedule A attached hereto, and such other Corporate
Affiliates as may be designated from time to time by the Board upon its decision
to extend the benefits of the Plan to its Eligible Employees.
"Semi-Annual Entry Date" means the first business day of
January and July each calendar year within an Offering Period in effect under
the Plan.
"Semi-Annual Period of Participation" means each semi-annual
period for which the Participant actually participates in an Offering Period in
effect under the Plan. There shall be a maximum of four semi-annual periods of
participation within each Offering Period. Except as otherwise designated by the
Plan Administrator, each semi-annual period shall be six months (except for the
initial Offering Period, which may be less than six months) and shall end on the
last business day of December and June, respectively.
"Semi-Annual Purchase Date" means the last business day of
December and June each year on which shares of Common Stock are automatically
purchased for Participants under the Plan.
"Service" means the period during which an individual performs
services as an Eligible Employee and shall be measured from his or her hire
date, whether that date is before or after the Effective Date of the Plan.
"Start Date" shall mean the first date of any Offering Period.
Gateway Data Sciences Corporation
By: /s/ Michael M. Gordon
------------------------------
Name: Michael M. Gordon
------------------------------
Its: President
------------------------------
ATTESTED BY:
/s/ Matthew J. Gordan
- -------------------------------
Secretary
12
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended January 31,
1996 1997
---- ----
<S> <C> <C>
Net income $ 1,083 $ 2,313
Add - interest on convertible debt 53 --
---------- ----------
Net income for primary income per common share $ 1,136 $ 2,313
========== ==========
Weighted average number of common shares outstanding
during the year 1,048,981 2,651,964
Add conversion of debt to common shares 494,218 --
Add common equivalent shares (determined using the treasury
stock method) representing shares issuable upon exercise of
incentive stock options and warrants 57,981 190,796
---------- ----------
Weighted average number of shares used in calculation
of primary earnings per share 1,601,180 2,842,760
========== ==========
Primary earnings per share .71 .81
========== ==========
</TABLE>
ARTHUR ANDERSEN LLP
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 on Form S-8 (File No. 333-02976).
Arthur Andersen LLP
Phoenix, Arizona,
October 27, 1997.
<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
January 31, 1997 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> 12-MOS
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