Registration No. 333-37991
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
AMENDMENT NO. 2
to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GATEWAY AMERICAN PROPERTIES CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-139-1336
------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
9145 East Kenyon Avenue, Suite 200
Denver, Colorado 80237
303/843-9742
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices and principal place of business)
Harvey E. Deutsch
9145 East Kenyon Avenue, Suite 200
Denver, Colorado 80237
303/843-9742
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Gilbert L. McSwain David A. Carter, P.A.
1660 S. Albion Street, Suite 309 2300 Glades Road, Suite 210
Denver, Colorado 80222 Boca Raton, Florida 33431
303/753-8805 561/750-6999
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
<TABLE>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities to be Price Offering Registration
to be Registered Registered Per Unit(1) Price Fee
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Common Stock, $.01 par value (2) 2,052,000 $4.00 $ 8,208,000 $ 2,487.00
- -------------------------------------------------------------------------------------
Common Stock Purchase Warrants 3,450,000 .1875 646,875 196.00
("Warrants")(3)
- -------------------------------------------------------------------------------------
Common Stock Underlying Warrants 3,450,000 4.50 15,525,000 4,705.00
- -------------------------------------------------------------------------------------
Common Stock Representative 150,000 --- 10 (5)
Warrants
- -------------------------------------------------------------------------------------
Common Stock Issuable Upon Exercise
of Representative Warrants 150,000 6.00 900,000 273.00
- -------------------------------------------------------------------------------------
Warrant Representative Warrants(4) 300,000 --- --- ---
- -------------------------------------------------------------------------------------
Underlying Warrants 300,000 .290625 87,188 27.00
- -------------------------------------------------------------------------------------
Common Stock Issuable Upon Exercise
of Underlying Warrants 300,000 6.975 2,092,500 634.00
- -------------------------------------------------------------------------------------
Common Stock Underlying Founders
Warrants 300,000 4.50 1,350,000 409.00
- -------------------------------------------------------------------------------------
Total $28,809,573 $8,731.00
</TABLE>
(Footnotes on next page)
<PAGE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(2) Includes a maximum of 225,000 shares of Common Stock and 450,000
Warrants that may be issued to the Underwriter pursuant to an
over-allotment, as well as 327,000 shares of Common Stock being registered
on behalf of certain Selling Shareholders.
(3) Includes 3,000,000 Common Stock Purchase Warrants to be offered to the
public and 450,000 Common Stock Purchase Warrants which may be offered to
the public pursuant to an overallotment.
(4) The Representative Warrants allow the holder to purchase 300,000
Underlying Warrants and 300,000 shares of Common Stock with each
Underlying Warrant, permitting the Representative to purchase an
additional share of Common Stock.
(5) No fee required pursuant to Rule 457(g).
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall become effective in accordance with Section 8(a) of the Securities Act of
1933 or until the Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
The form of Prospectus filed as part of this Registration Statement has two
versions, the first of which will be utilized in connection with the
underwritten public offering of 1,500,000 shares of common stock and 3,000,000
redeemable common stock purchase warrants, and the second of which (the
Alternate Prospectus) will be utilized by the Selling Stockholders. Copies of
each prospectus in the exact form in which it will be used after effectiveness
will be filed with the Securities and Exchange Commission pursuant to Rule
424(b).
<PAGE>
SUBJECT TO COMPLETION DATED __________________, 1998
PROSPECTUS
GATEWAY AMERICAN PROPERTIES CORPORATION
1,500,000 Shares of Common Stock
3,000,000 Redeemable Common Stock
Purchase Warrants
--------------------
GATEWAY AMERICAN PROPERTIES CORPORATION (the "Company") is offering
1,500,000 shares of Common Stock, $.01 par value (the "Shares" or the "Common
Stock"), and 3,000,000 Redeemable Common Stock Purchase Warrants (the "Purchase
Warrants" or "Warrants") by means of this Prospectus. Prior to this offering,
there has been no public market for the Common Stock or the Warrants of the
Company. For information regarding the factors considered in determining the
initial public offering prices of the Common Stock and the Warrants, see "RISK
FACTORS" and "UNDERWRITING".
The Common Stock and the Warrants of the Company are being offered
separately and after the offering, may be separately transferred. Each Warrant
entitles the holder to purchase one share of Common Stock at a price of $4.50 at
any time until ________________, 2003, provided the shares underlying the
Warrants are then subject to an effective Registration Statement and current
Prospectus. The Warrants are redeemable by the Company at a price of $.35 each
upon 30 days notice if the closing bid price of the Common Stock shall have been
at least $6.40 per share for 30 consecutive trading days, as reported on the
Nasdaq SmallCap(R) Market ("Nasdaq SmallCap"); provided: (a) the notice of
redemption is mailed within ten days after the end of such period; and (b) there
is then a current, effective Registration Statement under the Securities Act of
1933, as amended (the "Act") relating to the Common Stock issuable upon exercise
of the Warrants. Application has been made to list the Common Stock and Warrants
of the Company on Nasdaq SmallCap under the symbols __ and __W respectively.
Prior to the first anniversary of the Effective Date, the Purchase Warrants will
not be redeemable by the Company without the written consent of Barron Chase
Securities, Inc. (The "Representative") acting as representative of the several
underwriters identified elsewhere herein (the "Underwriters"). See "RISK FACTORS
- - Possible Lack of Value of Warrants; Possible Inability to Exercise Warrants."
The Registration Statement of which this Prospectus is a part, also
include 327,000 shares of Common Stock and 300,000 shares underlying outstanding
Founders Warrants ("Selling Stockholders Shares") for resale by certain
stockholders of the Company ("Selling Stockholders"). Of the 627,000 Selling
Stockholders Shares, 27,000 shares may not be sold for 90 days from the date of
this Prospectus and the balance may not be sold until 15 months from the date of
the Prospectus. None of these 627,000 shares are being underwritten by the
Underwriters and the Company will not receive any of the proceeds from the sale
of the Selling Stockholders Shares. See "SELLING STOCKHOLDERS".
The Shares and Warrants constitute a speculative investment and are
subject to material risks. The Common Stock is also subject to substantial
immediate dilution. The Shares and Warrants should only be purchased by persons
who can bear the continuing risk of a speculative investment. See "RISK
FACTORS", "DILUTION" and "DESCRIPTION OF SECURITIES" on pages 10, 26 and
54 respectively.
- --------------------------------------------------------------------------------
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. Information
contained herein is subject to completion or amendment. These securities may not
be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell of the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
- --------------------------------------------------------------------------------
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR AND STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Public Underwriting Discount(1) Proceeds to Company(2)
Per Share $ 4.00 $ .40 $ 3.60
Per Warrant .1875 .01875 .16875
Total (3) $6,562,500.00 $ 656,250.00 $5,906,250.00
BARRON CHASE SECURITIES, INC.
The date of this Prospectus is __________________, 1998
Footnotes to Table:
(1) Does not include additional compensation in the form of (a) a
non-accountable expense allowance of $196,875 of which $30,000 has been
paid,($226,406 if the Underwriters' over-allotment option is exercised in
full as described in Note (3) below); (b) Common Stock Representative
Warrants to purchase up to 150,000 shares of Common Stock at $6.00 per
Share, and Warrant Representative Warrants exercisable at $.290625 per
warrant to acquire up to 300,000 Underlying Warrants which are exercisable
to purchase up to 300,000 shares of common stock at $6.975 per share, all
exercisable over a period of five years commencing on the date of this
Prospectus, and (c) a Financial Advisory Agreement for the Representative
to act as an investment banker for the 12 month period from the Effective
Date for and on behalf of the Company at a fee of $108,000, payable at the
closing of this offering of Common Stock and Warrants. In addition, the
Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Act. See "UNDERWRITING".
(2) Before deducting expenses of this offering all of which are payable by the
Company and estimated at $420,000 (of which $80,000 has been paid and which
is approximately 6% of the gross proceeds of this offering), which amount
includes the Representative's non-accountable expense allowance described
in Note (1) above. The only expenses to be paid by the Selling Stockholders
will be the commissions or other expenses directly attributable to their
specific sales.
(3) The Company has granted to the Underwriters an option, exercisable within
45 days from the date of the consummation of this offering of Common Stock
and Warrants, to purchase up to an additional 225,000 shares of Common
Stock and an additional 450,000 Warrants on the same terms and conditions
as set forth above in order to cover over-allotments, if any (the
"Over-Allotment Option"). If all of such additional shares of Common Stock
and Warrants are purchased, the price to the public, Underwriting discounts
and proceeds to the Company as indicated in the table on the cover page
hereof, will be increased to $7,546,875, $754,687.50 and $6,792,187.50
respectively. See "UNDERWRITING".
The Common Stock and Warrants are being offered by the Underwriters
subject to prior sale, when, as and if delivered to, and accepted by, the
Underwriters, and subject to the approval of certain legal matters by counsel
and certain other conditions. It is expected that delivery of the Common Stock
and the Warrants will be made at the offices of Barron Chase Securities, Inc.,
7700 West Camino Real, Boca Raton, Florida 33433-5541 on or about _______, 1998.
2
<PAGE>
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK
AND THE WARRANTS OF THE COMPANY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
At the Effective Date, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act")
and, in accordance therewith, will be required to file reports, proxy or
information statements and other information with the Securities and Exchange
Commission (the "Commission"). At the Effective Date, the Securities will be
listed on Nasdaq SmallCap. Accordingly, such reports, proxy statements and other
information can be inspected and copied at the Commission's principal office,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; the
Northeast Regional Office of the Commission at 7 World Trade Center, Suite 1300,
New York, New York 10048; and the Midwest Regional Office of the Commission,
Citicorp Center, 500 West Madison street, Suite 1400, Chicago, Illinois 60661,
where copies may be obtained upon payment of the fees prescribed by the
Commission, as well as at the offices of The Nasdaq Stock Market, Inc., 1735 K
Street, N.W., Washington, D.C. Such documents may also be obtained through the
website maintained by the Commission at http://www.sec.gov. Holders of the
Company's Common Stock and Warrants will be able to obtain the most recent such
reports by making written requests therefore to the Company's offices located at
9145 East Kenyon Avenue, Suite 200, Denver, Colorado 80237, Attention: Joel H.
Farkas. The Company's telephone number at such address is 303/843-9742.
3
<PAGE>
INTRODUCTORY STATEMENT
----------------------
Apollo III, Inc., a Florida Corporation ("Apollo") was organized on
December 23, 1992 for the purpose of acquiring or consolidating with one or more
other business entities. Gateway American Properties, LLC, a Colorado limited
liability company ("Gateway LLC") was organized in June of 1992; and since then
has been engaged in the business of purchasing and developing real property into
platted, finished and semi-finished lots for sale to residential homebuilders.
In the fall of 1994, representatives of Apollo and Gateway LLC entered into
negotiations relative to a business combination of these entities which would
also involve and be contingent upon the concurrent acquisition of capital from a
public offering of securities.
In January of 1995, Apollo and Gateway LLC reached an understanding in
principle regarding the proposed business combination project. On January 12,
1995, Apollo formed Gateway American Properties Corporation, a Florida
corporation ("Gateway American-Florida"), as an affiliate for the purpose of
participating in the business combination. In early April 1995, Apollo, Gateway
American-Florida, Gateway LLC and the owners of Gateway LLC entered into an
agreement effective as of January 27, 1995 which agreement provided for: (i) the
merger of Apollo into Gateway American-Florida; (ii) the acquisition by Gateway
American-Florida of all the outstanding membership interests in Gateway LLC; and
(iii) the acquisition of capital from a public offering of securities of Gateway
American-Florida. On April 10, 1995, the parties to the proposed business
combination entered into a Letter of Intent with the Representative for the
underwriting of the public offering of securities included therein; and on
October 11, 1995 Gateway American- Florida filed a Registration Statement with
the Securities and Exchange Commission covering the proposed public offering of
its securities. After this Registration Statement was filed, a difference of
opinion developed between Apollo and Gateway American-Florida and the
Representative involving the terms of the business combination and the public
offering principally relating to the amount of securities to be received in the
business combination by the shareholders of Apollo and Gateway American-Florida,
the owners of Gateway LLC and the purchasers in the public offering.
Accordingly, the prior Registration Statement was withdrawn and the project was
delayed, pending the renegotiation of the terms of the business combination and
public offering. Apollo paid all of the expenses relating to the January 27,
1995 agreement and the prior Registration Statement utilizing the invested funds
of the holders of the outstanding equity security holders.
In January of 1997, the parties reached an understanding on the revisions
to the business combination and offering terms and work on the project was
resumed. Apollo was merged into Gateway American-Florida effective for
accounting purposes as of January 13, 1995. Since all of the assets and
operations of Gateway LLC are located in Colorado and it is not anticipated that
there will be any future operations in Florida, it was concluded that the
business combination should include the redomestication of Gateway
American-Florida as a Colorado corporation. Accordingly, Gateway American
Properties Corporation, a Colorado corporation ("Company") was formed for that
purpose on March 21, 1997. Effective as of January 27, 1997, Gateway
American-Florida, the Company, Gateway LLC and the owners of Gateway LLC entered
into an agreement providing for the business combination ("Combination
Agreement"). The Combination Agreement entirely superceded and replaced the
agreement of January 27, 1995 relating to the business combination.
Pursuant to the Combination Agreement on October 8, 1997 Gateway
American-Florida was redomesticated into a Colorado corporation through a
statutory merger with the Company as the surviving corporation (effective for
accounting purposes as of June 30, 1997). In this merger the shareholders of
Gateway American-Florida received 327,000 shares of the Company's Common Stock
and Common Stock Purchase Warrants to purchase 300,000 shares of the Common
Stock ("Founders Warrants"). The Founders Warrants are exercisable at $4.50 per
share on the same terms and conditions as the Purchase Warrants offered to the
public by this Prospectus. Gateway American-Florida and Apollo are both
considered as "predecessors" of the Company as that term is defined under the
Securities Act of 1933, as amended.
4
<PAGE>
Under the Combination Agreement and immediately prior to the Effective Date
of the Registration Statement of which this Prospectus is a part, the parties
will complete and consummate the business combination transaction in which the
Company will acquire all of the outstanding membership interests of Gateway LLC,
in exchange for 2,025,000 shares of Common Stock subject only to the completion
of the public offering. Such transaction is referred to in this Prospectus as
the "Transaction". See "CERTAIN TRANSACTIONS".
Upon completion of the Transaction, the Company will continue the business
activities of Gateway LLC directly or through Gateway LLC as a wholly owned
subsidiary. The management of the Company does not believe that the present is
an appropriate time to make a definite decision whether or not to continue
operating Gateway LLC as a subsidiary or to merge it into the Company or to
liquidate its assets or operations into the Company and conduct all future
operations directly out of the Company. See "PROSPECTUS SUMMARY" and "BUSINESS".
Unless otherwise indicated, the information presented in this Prospectus
reflects and assumes the consummation of the Transaction and refers to the
Company and Gateway LLC as a combined entity.
The following chart reflects the corporate structure and history of the Company.
Apollo Gateway American-Florida
COMPANY PREDECESSOR COMPANY PREDECESSOR
------------------- --------->> -------------------
Apollo III, Inc., Gateway American Properties
a Florida Corp. Merged into Corporation, a Florida Corp.
Formed 12/92 to Pursue as of 1/13/95 Founded 1/95 as Transactional
Business Combination Vehicle |
|
|
Merged into on 10/8/97 |
THE COMPANY |
----------- <<-------
Gateway American Properties Corporation,
a Colorado Corp.
Formed 3/97 to Merge with
Gateway American-Florida, Acquire <<-------
Gateway LLC and Make Public Offering |
|
|
Acquired Effective Date |
SUBSIDIARY OF COMPANY |
--------------------- |
GAP LLC, |
a Colorado limited liability company |
formed 6/92 to Acquire, Develop and Sell -----
Real Estate for Residential Building
5
<PAGE>
PROSPECTUS SUMMARY
------------------
Set forth below is a summary of certain information contained in this
Prospectus. Such information is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
The Company
-----------
The Company was formed pursuant to Colorado law on March 21, 1997. For the
past four years its subsidiary, Gateway LLC, has been engaged in the business of
purchasing and developing real property into platted, finished and semi-finished
lots for sale to residential homebuilders. Gateway LLC typically purchases real
property that is zoned for residential use and develops such property into
finished lots for sale to homebuilders who will construct single family detached
or multi-family attached homes on the finished lots. Homes constructed on these
lots are generally priced between $100,000 and $250,000. Gateway LLC seeks to
provide its home builder customers with (i) approved and platted finished or
semi-finished residential building sites, (ii) a variety of geographical
locations, and (iii) delivery within time frames which meet the home builders'
needs. The Company was formed for the purpose of acquiring Gateway LLC and the
capital funds from this offering and continuing the operations of Gateway LLC
directly or through it as a subsidiary. See "INTRODUCTORY STATEMENT" and
"CERTAIN TRANSACTIONS".
Gateway LLC (including GV Development, LLC, a predecessor of Gateway LLC
which was merged into Gateway LLC on December 31, 1994) was organized in June,
1993. From its organization through September 30, 1997, the Company's lot sales
have increased from fewer than 20 lots sold in 1994, to 194 lots sold in 1995
and to 478 lots in 1996. For the nine month period ending September 30, 1997,
Gateway LLC has sold 340 lots. As of September 30, 1997, it had an inventory of
1406 lots which have been zoned and platted and an additional 526 that are under
development. Its lots in inventory and lots under contract are located in eight
cities and counties in the greater Denver metropolitan area and in Fort Collins,
Colorado.
Presently the home builders who have acquired lots, or are presently under
contract to acquire lots from the Company are PrideMark Home Building Group LLC
("PrideMark"), US Home, Melody Homes, Sheffield Homes, Continental Homes,
Sundown Development, Paul Adam Custom Homes, d/b/a Odyssey Homes, Meadow Homes
and Strauss Homes. PrideMark is a private corporation principally owned by
Michael A. Messina, who is also a director, officer and principal shareholder of
the Company. Accordingly, PrideMark is an "affiliate" of the Company as that
term is defined under the Securities Act of 1933, as amended. PrideMark has
historically been the principal purchaser of lots from the Company. Since
PrideMark is a private company, purchasers of the offered securities will not be
able to obtain financial information on PrideMark. See "RISK FACTORS - Majority
of Lots Sold to Affiliated Party". The Company is also engaged in building
luxury townhomes in Roxborough Park in Douglas County, Colorado, on property it
owns and has developed. The Company may, from time to time, engage in such
building activities. See "BUSINESS", "CERTAIN TRANSACTIONS", "MANAGEMENT" and
"PRINCIPAL SHAREHOLDERS".
6
<PAGE>
Certain Transactions with Affiliates
------------------------------------
Historically, over 50% of the Company's real property purchases have been
from affiliated parties. These transactions have involved 12 property purchases
with an aggregate purchase price paid by Gateway LLC of approximately
$8,965,165. The approximate aggregate cost of these properties to the sellers
was $4,803,380, resulting in an approximate gross aggregate profit to the
sellers of $4,161,785. Of this gross aggregate profit, approximately $3,011,501
inured to the benefit of Messrs. Deutsch, Farkas and Messina, officers and
directors of the Company through their interests in the selling entities. The 12
purchased properties were held by the selling entities for periods of up to 53
months with an average per property holding period of approximately 20 months.
For details on these transactions, see "CERTAIN TRANSACTIONS - Certain
Purchase/Sale Transactions". In addition, Gateway LLC purchased all of the
membership interests, at a price equal to the aggregate capital accounts of the
members, of Sterling Hills, Ltd. Of the total purchase price, an aggregate of
$265,664 inured to the benefit of Messrs. Deutsch, Farkas and Messina. See
"CERTAIN TRANSACTIONS - Certain Purchase/Sale Transactions - Property Purchases
from Affiliates", and Footnote 5 to the table therein. The Company plans to
reduce such transactions in the future and has taken steps over the past two
years toward that end. The Company and the involved affiliated parties have
agreed that on any such future purchases the Company will pay a purchase price
of 10% below the fair market value of the properties, based upon independent
expert appraisals. The appraiser used in the prior property purchases has had no
existing relationship to the Company, Gateway LLC or any of their affiliates;
and in most cases the appraisals were prepared for the independent financial
institution providing the financing for the purchase. All future appraisals will
be obtained from independent appraisers.
For the 33 month period beginning January 1, 1995, 68% of the finished and
semi-finished lots sold by the Company have been sold to the affiliate,
PrideMark. Over the next 12 months it is anticipated that the Company will
continue to sell between one-third and one-half of its platted, semi-finished
and finished lots to PrideMark. Thus, PrideMark has historically been the
principal purchaser of lots from the Company. Since PrideMark is a private
company, purchasers of the offered securities will not be able to obtain
Financial information on PrideMark. See "RISK FACTORS - Majority of Lots Sold to
Affiliated Party".
In addition, the Company utilizes legal services from a law firm of which
Mr. Deutsch, an officer, director and principal shareholder of the Company, is a
shareholder and principal. Mr. Deutsch has agreed that commencing on the
Effective Date, he will have no economic interest in any legal fees paid by the
Company to the law firm for services rendered subsequent to the Effective Date.
For additional information on transactions with affiliated parties, see
"RISK FACTORS" and "CERTAIN TRANSACTIONS".
7
<PAGE>
The Offering
------------
Common Stock offered 1,500,000 Shares
Warrants offered 3,000,000 Warrants
Common Stock to be outstanding after
the Offering(without any Warrant Exercise 3,852,000 Shares
Proposed Nasdaq SmallCap Symbols Common Stock Warrants
____________ ______-W
The number of shares of Common Stock and Warrants to be outstanding as
reflected above does not take into account additional shares of Common Stock and
Warrants which may be outstanding to the extent that the Over-Allotment Option
granted to the Underwriters is utilized. The information presented above also
does not take into account warrants which are being granted to the
Representative.
Use of Proceeds
---------------
The net proceeds to be received by the Company as a result of this offering
are estimated at approximately $5.5 million. The net proceeds are expected to be
utilized by the Company as follows; (i) 41.9% for the acquisition and
development of real estate properties, including off site development improve
ments; (ii) 47.2% for reduction of debt; (iii) 1.8% for marketing and
advertising; (iv) 9.1% for general working capital. Of the total proceeds 26.2%
will be paid to affiliates and 15.9% will be used to make payments which will
benefit affiliates. See "USE OF PROCEEDS".
Risk Factors
------------
An investment in the Common Stock and Warrants of the Company involves a
substantial degree of risk and should not be made by investors who cannot afford
the loss of their entire investment in such securities. See "RISK FACTORS".
Unaudited Selected Pro Forma Financial Data
-------------------------------------------
The unaudited pro forma selected financial data as of September 30, 1997
and for the year ended December 31, 1996 and the nine months ended September 30,
1997 are derived from the unaudited pro forma condensed balance sheet and
statements of operations set forth subsequently in this Prospectus, which give
effect to the Transaction in the manner described in the notes to the pro forma
condensed financial statements. The pro forma selected financial data presented
below and the pro forma condensed financial statements should be read in
conjunction with the accompanying notes to the pro forma condensed financial
statements, the historical financial statements and the notes of each of the
respective companies, all of which are included subsequently in this Prospectus.
The unaudited pro forma condensed statements of operations are not necessarily
indicative of future operations or the actual results that would have occurred
had the Transaction been consummated at the beginning of each period presented.
8
<PAGE>
Gateway American Properties, Corp.
(A Colorado Corporation)
Unaudited Pro Forma Selected Financial Data
Giving Effect to the Transaction and Offering
Year Ended Nine Months
December 31 Ended September 30,
1996 1997
------ ------
Income Statement Data:
Sales $10,500,606 $6,746,545
Gross Profit(1) 951,526 1,393,114
Operating Income (Loss) (306,730) 584,973
Net Income (Loss) (386,802) 303,876
Net Income (Loss) per Common Share(2) (.10) .13
As adjusted for
September 30, 1997 Offering
------------------ --------
Balance Sheet Data:
Total Assets(3) $24,261,005 $27,147,255
Debt(3) 23,304,272 20,704,272
Stockholders' Equity 845,330 6,331,580
- ------------
(1) Gross profit is defined as total sales less cost of sales.
(2) Net income per common share reflects the 1,500,000 Shares that will be
outstanding after the consummation of the Transaction and the offering
described in this Prospectus which will occur in conjunction with and as a
part of the Transaction. These income calculations do not give any effect
to the proceeds that will be received pursuant to the offering described in
this Prospectus.
(3) Consistent with industry standards, assets and liabilities are not
classified as either current or long term and, therefore, information
relating to such classifications is not presented.
The SELECTED FINANCIAL INFORMATION section of this Prospectus sets forth
selected historical financial data for Gateway LLC, and the Company and pro
forma financial data, assuming the consummation of the Transaction described in
the Prospectus sections "INTRODUCTORY STATEMENT" and "CERTAIN TRANSACTIONS", all
as of the dates described in the historical financial statements of Gateway LLC,
Apollo and the Company and in the pro forma financial statements.
9
<PAGE>
RISK FACTORS
------------
The securities offered by this Prospectus involve a high degree of risk and
should be considered speculative securities. Investors should not purchase any
of the offered securities unless they can afford to lose their entire
investment. Additionally, the business activities of the Company which relate to
the acquisition of real property for further development into platted,
semi-finished and finished residential building lots are subject to being
affected in an adverse material way by the risk factors set forth below.
Interested investors should carefully consider the following risks relative to
the Company, its business and the offered securities in determining whether to
purchase the Common Stock and Warrants of the Company.
Substantial and Immediate Dilution and Benefit to Present Stockholders.
This offering involves immediate dilution of $2.43 per share (approximately
60.75% of the per share offering price) between the pro forma net tangible book
value per share of Common Stock after the offering of $1.57 (34.25%) and the
public offering price of $4.00 per share. The existing stockholders of the
Company have acquired their shares of Common Stock at an average consideration
per share of $.34, which is nominal in comparison to the $4.00 per share public
offering price. Accordingly, purchasers of the Common Stock and Warrants offered
hereby will bear substantially all of the financial risks inherent in an
investment in the Company during the immediate to near term future time. See
"DILUTION".
Continuation of Voting Control by Management. As of the Effective Date, the
officers and directors, members of their families and trusts created for members
of their families, own of record and beneficially 1,822,500 shares of Common
Stock of the Company, constituting 47.3% of all Shares to be outstanding at the
conclusion of the offering made hereby if the Over-Allotment Option is not
utilized and 45.5% of Shares to be outstanding at the conclusion of the offering
if the Over-Allotment Option is utilized in its entirety. All 2,025,000 shares
of Common Stock issued for the membership interests in Gateway are subject to a
Voting Trust Agreement, pursuant to which Messrs. Deutsch, Farkas and Messina
have the voting rights for such Shares. The Voting Trust Agreement gives Messrs.
Deutsch, Farkas and Messina voting control over 52.5% of all Shares to be
outstanding at the conclusion of the offering made hereby if the Over-Allotment
Option is not utilized and 50.6% of the Shares to be outstanding at the
conclusion of this offering if the Over- Allotment Option is exercised in its
entirety. Accordingly, as a practical matter Messrs. Deutsch, Farkas and Messina
will be able to elect the Company's entire Board of Directors and to determine
the disposition of all matters submitted to a voting of the Company's
shareholders. See "PRINCIPAL STOCKHOLDERS" and "DESCRIPTION OF SECURITIES".
Limited History of Operations. The Company was formed in March of 1997 for
the express purpose of effecting the Transaction, upon completion of which the
Company will continue the business of Gateway LLC. Gateway LLC was formed as a
Colorado limited liability company in June, 1994. Effective December 31, 1994,
GV Development, LLC, a Colorado limited liability company which was formed in
June, 1993, was merged into Gateway LLC pursuant to the applicable provisions of
the Colorado Limited Liability Company Act. GV Development, LLC's business
activities were similar to Gateway LLC and GV Development, LLC was under the
control of substantially the same members as Gateway LLC. Accordingly, the
activities of GV Development, LLC, are included as those of Gateway LLC for
purposes of this Prospectus and the consolidated financial statements of Gateway
LLC contained herein. During the fiscal years ending December 31, 1995 and 1996,
Gateway LLC experienced net incomes of $9,748 and $109,444 respectively and of
$523,346 for the nine months ended September 30, 1997. While profitable
operations have, accordingly, occurred during the 33 month period ending
September 30, 1997, there can be no assurance that the Company will continue to
operate profitably with respect to the business previously conducted by Gateway
LLC. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS".
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Outstanding Debt Obligation and Encumbrance of Assets. From the inception
of Gateway LLC through September 30, 1997, Gateway LLC sold its 12% Secured
Promissory Notes as follows: principal amount of $6 million, due September 30,
1996; principal amount of $3 million due April 30, 1997; and principal amount of
$4 million due September 30, 1999 (the "Notes"). For further information
concerning such Notes, see "MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "CERTAIN TRANSACTIONS". As of September
30, 1997, the $6 million Note due September 30, 1996 and the $3 million Note due
April 30, 1997 have been paid in full. The $4 million Note (the "Note") due
September 30, 1999 is outstanding and a principal payment of $500,000 was due
December 31, 1997 and an additional $500,000 will be due at the end of each
calendar quarter thereafter with any unpaid balance due September 30, 1999. The
Company made the December 31, 1997 principal payment of $500,000 from funds from
operations. The Company will pay a total of $750,000 on the principal of the
Note from the proceeds of the offering and the balance will be paid from funds
from operations or debt financing. The obligation represented by the Note is
secured by deeds of trust which encumber a substantial portion of the inventory
of platted, finished and semi-finished residential building lots held by the
Company presently and from time to time. The obligation represented by the Note
has been expressly assumed by the Company. The principal and interest obligation
of the Note is presently unconditionally guaranteed by Messrs. Deutsch, Farkas
and Messina. The Company has agreed to indemnify Messrs. Deutsch, Farkas and
Messina from and against any liability, cost or expense incurred by them under
any loan or obligation obtained by or for the benefit of the Company, including
their guarantees of the Note. The $4 million on the Note was received from
approximately 39 investors including individuals, pension or retirement plans
and trusts in investments ranging from $25,000 to $300,000 with an average
investment of approximately $102,500. Only one of these investors, a family
partnership, with a $100,000 investment, has any affiliation with the Company
which involves the ownership of 5,533 shares of the Company's outstanding Common
Stock. The possibility exists that additional private placements of debt
obligations may be conducted by the Company. In the private placement of the
Note, the Company received assistance from Phillips & Tober, Inc. of Denver,
Colorado, a securities broker-dealer. Phillips & Tober, Inc. has certain rights
of first refusal with respect to any future private offerings of debt
participation obligations of the Company. This first right of refusal does not
apply to loans by financial institutions. The Company has no present plans to
conduct any additional private placement of debt obligations. In addition to the
Note, the Company had other outstanding debt as of September 30, 1997, totaling
$17,120,657 made up of $12,225,169 due to banks, $2,500,219 due to related
parties and to others $2,395,269. Of the total other debt, $15,757,644 is
secured by liens against the real property of the Company under arrangements
providing for the payment of substantial portions of the proceeds received upon
the sale of platted, finished or semi-finished lots. For further information
concerning such debt and the related maturity dates, see Note 3 to the
consolidated financial statements of Gateway LLC included elsewhere in this
Prospectus.
Environmental Risks of Properties Acquired and to be Acquired. With respect
to any real property acquired by the Company, investigatory processes
customarily used in the development industry will have to be accomplished in
order to assure to the extent reasonably practicable that such properties are
not contaminated by any hazardous waste, or, if there is a contamination, that
such contamination can be eliminated or mitigated and does not affect the
building lots. The Company believes, as of the date of this Prospectus, that the
properties constituting its inventory of platted, semi-finished and finished
residential building lots are not contaminated by any hazardous waste. However,
there can be no absolute assurances that hazardous waste that cannot be
effectively removed or mitigated does not or will not in the future be found to
exist under any of the properties owned by the Company or on properties located
close enough to such properties to allow migration of hazardous materials onto
the Company's properties. In such event, the Company may be required to expend
substantial funds to remedy and clean up hazardous waste and the presence of
hazardous waste may adversely affect the ability of the Company to sell or
refinance such properties or to continue to develop such properties. As
indicated subsequently in this Prospectus section and elsewhere herein, a
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substantial portion of the Company's inventory of platted, semi-finished and
finished residential building lots is subject to a lien securing the principal
and interest obligation of certain outstanding debt obligations of the Company.
See "MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS". In the event that any of such lots are found to be contaminated by
any hazardous waste, the Company will be obligated to replace such contaminated
lots with uncontaminated lots pursuant to the terms of issuance of such
outstanding debt obligations. The Company does not presently carry insurance
against losses caused by hazardous waste or other catastrophe such as
earthquakes or tornadoes.
Geographic Concentration. The residential lot development activities of the
Company and Gateway LLC have been concentrated in the greater Denver
metropolitan area and in Fort Collins, Colorado. See "BUSINESS - Introduction".
The residential lot development and home building market in such areas has
fluctuated greatly during the past approximate ten years. The markets in which
Gateway has operated and in which the Company will operate have experienced
substantial fluctuation in local economic conditions which have been both
adverse and favorable. The market area is also affected by regional and national
economic conditions such as interest and rates of inflation, relative levels of
employment, and local, state and federal governmental policies and regulations.
Presently the Company believes that the markets in which the Company presently
operates are experiencing favorable economic conditions but no assurance can be
given that such circumstance will continue over the near or mid future time.
Regulatory Factors. In its development activities relating to residential
building lots, the Company operates in a strict regulatory environment which
will involve the procurement of necessary zoning classifications, permits and
other authorities permitting the development and further development of real
property acquired. As part of the zoning and subdivision processes, a developer
such as the Company generally is required to agree to complete certain
improvements to the subdivided property, and, in some instances, improvements to
neighboring properties ("off-site improvements") which service the proposed
subdivision, before the lots will qualify for the issuance of a building permit.
Until a lot can qualify for issuance of a building permit, it is not ordinarily
marketable by the Company to a home builder. Compliance with these requirements
may sometimes involve unforeseen delays and costs. See "BUSINESS - Regulatory
Factors".
Additional Capital Needs. The Company estimates that additional development
funds will be required to provide for the total costs of development of the
platted, unfinished and semi-finished lots intended to be acquired and developed
by the Company in the future. The Company anticipates that the required funds
will be provided from the proceeds of the Offering, sales of lots in a finished
state and the creation of additional debt obligations. If the needed funds are
not so available, lots may have to be sold in an unfinished state at
significantly reduced prices. See "BUSINESS - Additional Capital Needs".
Other Operational Risks. In addition to the operational risks enumerated
above, there are other development risks associated with completing the
improvements to the subdivision and lots and making the lots finished and
marketable to the home builder at a price that is profitable to the Company and
within a time frame that will allow the Company and the home builder to take
advantage of cyclical fluctuations in the market. See Market Risks below. Delays
related to governmental regulation, weather, availability of labor and
materials, ability and capacity of utility companies to connect utility service
and supply the volume of service necessary to meet the subdivision needs, and
increases in costs of labor and materials, all can adversely impact the value of
the residential building lots held by the Company.
Market Risks. The market for residential real estate is cyclical. A strong
or rising new home sales market creates demand for lot development. Often, in an
attempt to reach this market first, developers initiate new projects all at once
creating an oversupply of available lots when the lots are finished months later
after completion of the development process. Whether the demand for new lots
will keep pace with the competitive effort to supply lots is dependent on many
factors beyond the control of the Company. Consequently, there is a risk that
the Company may purchase property that it subsequently is unable to sell at a
profit or at all as a result of adverse conditions which develop in the market.
Also, in the normal course of business, it will be necessary for the Company to
expend funds to investigate and evaluate potential properties to be acquired by
the Company, to pay option deposits to secure purchase contracts for properties,
and to expend funds to obtain plats for properties (the costs of the platting
process can range from $50,000 to $500,000 per property), even though the
Company ultimately may not actually acquire the properties due to a downturn in
the market. See "BUSINESS - The Residential Home Building Industry".
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Future Operations Dependent Upon Property Availability. As of the date of
this Prospectus, the Company has only two property locations under contract and
identified for future acquisition. The Company's future operations will be
dependent upon its ability to locate, identify and acquire additional properties
for development, of which there is no assurance. See "BUSINESS - Property
Acquisition by the Company".
Dependence on PrideMark and Other Home Builder Customers. For the 33 month
period beginning January 1, 1995, 68% of the finished and semi-finished lots
sold by the Company have been sold to PrideMark, a home building company owned
by Michael A. Messina, who is an officer, director and principal stockholder of
the Company. It is anticipated that the Company will continue to sell between
one-third to one-half of its platted, finished and semi-finished lots to
PrideMark. The Company currently has eight other existing home builder
customers. As a consequence, the Company's success is heavily dependent upon the
economic health of PrideMark and its other customers and a bankruptcy or other
reorganization of any of these customers could have a material adverse effect
upon the Company's business. Even some of the largest production home builders
operating in the Denver metropolitan area have experienced reorganization
proceedings under the bankruptcy laws during the past approximate ten years.
Dependence on Key Personnel. Messrs. Harvey E. Deutsch, Joel H. Farkas and
Michael A. Messina presently serve as members of the Board of Directors of the
Company and as the executive officers of the Company. The ability of the Company
to successfully conduct its business is largely dependent upon the continuing
availability of such persons in their managerial capacities. Loss of the
services of Messrs. Deutsch, Farkas or Messina could have a material adverse
affect on the Company's ability to achieve its business objectives. The Company
and each of these three officers have entered into an employment agreement with
an initial term through December 31, 2000. The Company has obtained key-person
life insurance upon these three individuals in the amount of $1,500,000 each.
See "MANAGEMENT".
Property Purchases from Management and Continuing Conflicts of Interest. In
the past over 50% of the real property purchased by Gateway LLC has been from
entities in which Messrs. Deutsch, Farkas and Messina have had an interest.
These 12 transactions have involved an aggregate purchase price of $8,965,165
from properties in which the sellers aggregate cost was $4,803,380, with a
resultant gross aggregate profit to the sellers of $4,161,785. Of this profit
amount, an aggregate of approximately $3,011,501 inured to the benefit of
Messrs. Deutsch, Farkas and Messina. In addition, Gateway LLC purchased all of
the membership interests, at a price equal to the aggregate capital accounts of
the members, of Sterling Hills, Ltd. Of the total purchase price, an aggregate
of $265,664 inured to the benefit of Messrs. Deutsch, Farkas and Messina. See
"CERTAIN TRANSACTIONS - Certain Purchase/Sale Transactions - Property Purchases
from Affiliates", and Footnote 5 to the table therein. Although neither of these
Company officers or any other affiliate have any interest in any property the
Company has presently identified for future purchase, it is possible that future
property purchases from sellers in which management or other affiliates own an
interest may occur. For details as to the previous purchase transactions
involving affiliates, the procedures followed in determining property purchase
prices and the policies set up to be followed in property purchases from
affiliated parties. See "CERTAIN TRANSACTIONS - Certain Purchase/Sale
Transactions", "BUSINESS - Property Acquisition by the Company", and "BUSINESS -
Conflicts of Interests".
Benefits to Management from Use of Proceeds and Management's Discretion in
Allocation of Proceeds. The Company's use of proceeds of the offering will
result in substantial direct and indirect benefits to Messrs. Deutsch, Farkas,
Messina, and Sheldon as follows: (i) $573,000 will be paid to them for accrued
salaries; (ii) $870,000 will be paid to them for debt; (iii) $125,000 will be
paid on debt which will inure to their benefit; and (iv) the $750,000 to be paid
on the 12% Secured Note will benefit them, since they have unconditionally
guaranteed the Note. See "USE OF PROCEEDS" and "MANAGEMENT". The Company's Board
of Directors has and will exercise broad discretion in the allocation of the use
of offering proceeds.
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Company Offices Leased from Affiliate. The Company's offices and
administrative headquarters are located in facilities leased from 9145 E. Kenyon
LLC in which Harvey E. Deutsch and Norman A. Sheldon directors of the Company
are managers and members. See "CERTAIN TRANSACTIONS - Company Headquarters and
Providing of Legal Services".
Legal Services Provided by Affiliate. The law firm of Deutsch, Spillane &
Reutzel, P.C., in which Mr. Deutsch is a member, has and will continue to
provide legal services to the Company. See "CERTAIN TRANSACTIONS - Providing of
Certain Legal Services".
Majority of Lots Sold to Affiliated Party. The Company has historically
sold a substantial portion of its platted, semi-finished or finished lots to
PrideMark, a home construction firm owned by Michael A. Messina, who is also an
officer, principal shareholder, and a member of the Board of Directors of the
Company. From commencement of operations through September 30, 1997, the lot
sales to PrideMark constituted approximately 68% of total sales. It is
anticipated that the Company will continue to sell a portion of lots to
PrideMark in the future. Commencing in 1992, PrideMark began developing,
platting and acquiring lots to serve its own building needs. The future
operations of the Company will be dependent, in a large degree upon its ability
to develop and expand lot sales to parties other than PrideMark. In addition,
the Company has and will make lot sales to Strauss Homes, LLC, a firm in which
Jeffrey K. Prager, a key employee of the Company is a principal owner. See
"CERTAIN TRANSACTIONS", "MANAGEMENT" and "PRINCIPAL STOCKHOLDERS".
Competition. The residential lot development industry is highly
competitive. In times of strong demand for residential building lots, developers
are inclined to initiate a number of developments at substantially the same time
thereby potentially creating an oversupply of residential building lots in a
particular area. When demand for such residential building lots slackens,
downward pressure with respect to the pricing of such residential lots usually
occurs. Other factors will affect the relative competitive position of the
Company, including the location of the Company's platted, semi-finished and
finished lots, the presence of other competing entities in the Company's areas
of operations and the relative level of acceptance of the lots platted, finished
or semi-finished by the Company from an aesthetic point of view by the consumer.
Ultimate pricing of the lots will also be a competitive factor. Entities in
competition with the activities of the Company may be vested with substantially
greater financial, managerial and other resources than those available to the
Company at the conclusion of this offering. Since PrideMark commenced
developing, platting and acquiring lots for its own building needs in 1992 (See
"Majority of Lots Sold to Affiliated Party" above), to the extent PrideMark
conducts and expands these operations it competes with the Company from the
standpoint of the Company's ability to acquire suitable properties for
development. There can be no assurance that the Company will effectively meet
competition on a continuing basis. See "BUSINESS - Competition" and "CERTAIN
TRANSACTIONS - Competing Development Activities".
Uncertainties in and Speculative Status of Possible Participation in
Stapleton Airport Redevelopment. The Company is a member of a group of investors
and real estate developers that has made an unsolicited offer to purchase the
former Stapleton International Airport site in Denver, Colorado. Presently the
property is owned by the City and County of Denver ("City") and managed by a
non-profit entity (the "Stapleton Development Corporation"). The City has not
yet made a determination whether it wishes to privatize the redevelopment. If
the City does determine to privatize the redevelopment, it would determine
whether the sale would be: (a) for all or portions of the property; and (b)
negotiated or based upon an open bid procedure. The Company does not yet know:
(a) if the redevelopment of the property or any portion thereof would be
privatized; (b) the location or quantity of acreage that would be sold; (c) the
permitted land uses for such acreage; (d) the price; (e) the costs of
infrastructure installation; and (e) associated demolition costs or the other
costs of development of any portion of the property or the impact on the Company
in the event of a purchase. There is no assurance that, even in the event the
City decides to sell any or all of the property, the investment group of which
the Company is a member would be successful in any purchase efforts. See
"BUSINESS" - Other Activities.
Determination of Share and Warrant Offering Price. Prior to the offering
made hereby, there has been no public market for the Common Stock or Warrants of
the Company and there is no assurance that an active trading market for such
Common Stock and Warrants will develop or be sustained after the offering is
concluded or that the shares of Common Stock or the Warrants will be traded at
or above their initial public offering prices of $4.00 and $.1875, respectively.
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The initial public offering prices of the Common Stock and the Warrants were
determined through negotiations between the Company and the Representative based
upon the factors described herein and may not be indicative of the market prices
for the Common Stock or the Warrants subsequent to the conclusion of the
offering. In the determination of the offering prices, the Representative and
the Company made subjective evaluations of the Company's assets, management,
historical and future earnings, the present and projected economic conditions of
the area in which the Company operates and the status of the nation's securities
markets. See "UNDERWRITING".
Necessity to Maintain Nasdaq Listing. At the conclusion of the public sale
of the Common Stock and Warrants offered hereby, it is anticipated that such
Common Stock and Warrants will be eligible for listing on the Nasdaq SmallCap
Market. In order to continue to be listed on Nasdaq SmallCap, however, the
Company must maintain, among other criteria, $2 million in net tangible assets
or $35 million in market capitalization or $500,000 in net income (in the latest
fiscal year or in two of the last three fiscal years). In addition, the ability
to have such Common Stock and Warrants listed on a continual basis requires the
presence of two market makers and a minimum bid price of $1.00 per share. The
failure to satisfy these criteria on a continuous basis may result in the
delisting of the Common Stock of the Company from Nasdaq SmallCap, in which
event trading, if any, in the Common Stock would thereafter be conducted on the
OTC Bulletin Board or in the over-the-counter market. As a result of any such
delisting, investors may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Common Stock and Warrants.
Risks Relating to Low Priced Stocks. In the event that the Common Stock of
the Company were to be delisted from trading on Nasdaq SmallCap and no other
exclusion from the definition of "penny stock" under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") were available, trading in the Common
Stock of the Company would also be subject to the requirements of certain rules
promulgated under the Exchange Act by the Commission, which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock. Such rules require delivery, prior to any penny stock
transaction, of a disclosure document explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell or deal in penny stocks to persons who are other than
established customers of such broker-dealers or Accredited Investors. For these
types of transactions, the broker-dealer must make special suitability
determinations with respect to the purchaser and have received the purchaser's
written consent to the transactions prior to sale. The additional burdens
imposed upon broker-dealers by such requirements relating to penny stocks could,
most likely, discourage broker-dealers from effecting transactions in the Common
Stock and Warrants of the Company, which would severely limit and restrict the
market liquidity attributable to the Common Stock and the Warrants and the
ability of purchasers in this offering to sell the Common Stock and Warrants in
any secondary market.
Market for Common Stock and Warrants. In connection with this offering of
Common Stock and Warrants, the Underwriters may engage in stabilization
activities. The effect of such activities may result in the bid price for the
Common Stock and Warrants of the Company to be artificially maintained at a
level higher than if such activities are not undertaken. See "UNDERWRITING".
Additionally, the Underwriters are expected to sell the Common Stock and
Warrants to the their customers and to engage in market making activities with
respect to the after market for the Common Stock and the Warrants. No assurance
can be given that such market making activities of the Underwriters will
continue for any length of time and the withdrawal of one or more of the
Underwriters as market makers for the Company's Common Stock and Warrants could
have an adverse effect on the price of such securities and the after market for
such securities.
Shares Eligible for Future Sale. As of the Effective Date and prior to the
completion of this public offering there will be outstanding 2,352,000 shares of
Common Stock of the Company and Founders Warrants to purchase 300,000 shares of
Common Stock exercisable at $4.50 per share up to five years from the date of
this Prospectus. Of such shares and Founders Warrants, 327,000 shares of Common
Stock and all the shares underlying the Founders Warrants to purchase 300,000
shares have been registered under the Act simultaneous with this offering of
Common Stock and Warrants. Of such 327,000 shares of Common Stock, 27,000 shares
may not be sold for a period of 90 days from the Effective Date. The balance of
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300,000 shares of the Common Stock and the Founders Warrants to purchase 300,000
Shares are subject to "lock-up provisions" which preclude the ability of the
holders of such securities from selling into the market without the prior
consent of the Representative for the 15 month period subsequent to the
Effective Date. The remaining 2,025,000 shares of Common Stock of the Company
presently outstanding constitute Restricted Securities, as that term is defined
in Rule 144 promulgated under the Act. These Restricted Securities will be
eligible for public sale pursuant to Rule 144 at such time as such shares have
been held for a period of one year from the time of acquisition thereof.
Accordingly, the Restricted Securities may become eligible for future sale
during 1998; but they are also subject to the "lock-up provisions" for the 15
months from the Effective Date. The holder of Restricted Securities may effect
sales under Rule 144 if such holder complies with certain notice provisions with
respect to any such sale transactions and complies with certain volume
restrictions. The sale of substantial amounts of these securities in the public
market could adversely effect market prices of the securities, making it more
difficult, for the Company to sell equity securities in the future at a time and
price which it deems appropriate. See "DESCRIPTION OF SECURITIES".
Possible Adverse Effects of Redemption of Warrants. The Warrants offered
hereby may be redeemed by the Company at any time upon notice of not less than
30 days at a price of $.35 per Warrant, provided the closing bid quotation of
the Common Stock of the Company on 30 consecutive trading days has been at least
$6.40 and provided that such notice is mailed within ten days after the end of
such period in which such price exists. Prior to the first anniversary of the
Effective Date, the Purchase Warrants will not be redeemable by the Company
without the written consent of the Representative. Such redemption provisions
and the utilization thereof by the Company could compel the holders of the
Warrants to exercise the Warrants and pay the exercise price of $4.50 per share
issuable at a time when it may be disadvantageous for them to do so; to sell the
Warrants at the then current market price for the Warrants then prevailing in
the market therefor, if any, when they might otherwise wish to hold the
Warrants; or to accept the redemption price of $.35 per Warrant, which may be
substantially less than the market value of the Warrants at the time of any such
redemption. See "DESCRIPTION OF SECURITIES - Warrants".
Possible Lack of Value of Warrants; Possible Inability to Exercise
Warrants. The Warrants are exercisable at $4.50 per share of Common Stock and
expire five years from the date of this Prospectus. Should the market price for
the Common Stock not materially exceed $4.50 prior to that date or should the
Company be sold, merged, or otherwise reorganized in the transaction in which
its stockholders consideration at less than $4.50 per Share, the Warrants will
have no value. With respect to the public offering thereof, the Company intends
to qualify the sale of the Common Stock and Warrants described in this
Prospectus in a specified number of states. Although exemptions in the
securities laws of certain states may permit Warrants to be transferred to
purchasers in states other than those in which the Warrants were initially
qualified, the Company will be prevented from issuing Common Stock in such other
states upon the exercise of the Warrants unless an exemption from the
qualification requirements of such state or states is available or unless the
issuance of Common Stock upon exercise of the Warrants is qualified. Although
the Company will endeavor to qualify the Common Stock underlying the Warrants
for sale in a state where qualification is required and may be reasonably
obtained, there is no assurance that the Common Stock will be qualified for sale
in all of the states in which the ultimate purchase of Warrants reside. In such
event, the Warrants will expire and will have no value if they cannot be sold.
Accordingly, the market for the Warrants may be limited because of these
restrictions. Further, a current Registration Statement covering the Common
Stock issuable upon the exercise of the Warrants must be in effect before the
Company may permit the exercise of Warrants. For various reasons, no assurance
can be given that the Company will be in a position to file and process to
effectiveness a Registration Statement covering the Common Stock issuable upon
exercise of the Warrants. See "DESCRIPTION OF SECURITIES - Warrants".
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Representative Warrants. Pursuant to the Underwriting Agreement existing
between the Company and the Representative, the Representative will be issued
150,000 Common Stock Representative Warrants and 300,000 Warrant Representative
Warrants for which the Representative will pay a nominal consideration. The
300,000 Warrant Representative Warrants provide, upon full exercise and for the
payment of a purchase price of $.28125 per warrant, for the issuance of 300,000
Underlying Warrants. The Common Stock Representative Warrants and the Underlying
Warrants shall each be exercisable into one share of the Company's Common Stock
at an exercise price of $6.00 per share during the five year period commencing
on the Effective Date. With respect to the Representative's Warrants, the
Company will grant to the Representa tive certain registration rights which
could result in substantial expense to the Company and may be a hindrance to the
Company's ability to obtain future financing when needed. In the event that the
Representa tive's Warrants are exercised, sales of shares of the Common Stock
underlying the Representative's Warrants could have a depressive effect on the
market price of the Common Stock in the event that a public market develops. See
"UNDERWRITING".
Continuing Influence of Representative Upon the Company. Pursuant to the
underwriting terms the Representative may have the ability to exert continuing
influence upon the Company by reason of: (i) issuance of the 150,000 Common
Stock Representative Warrants and Warrant Representative Warrants; (ii) the
Financial Advisory Agreement to act as the Company's investment banker for the
12 months from the Effective Date for a fee of $108,000 payable at the closing
of the offering; (iii) the agreement of the Company to pay a specified fee to
the Representative if the Company enters into a covered business combination
arrangement with any party introduced by the Representative during the five
years from the Effective Date; and (iv) the right of the Representative to have
an observer attend the meetings of the Company's Board of Directors during the
three years from the Effective Date. See "UNDERWRITING".
Additional Warrants/Stock Options. In addition to the Warrants offered by
this Prospectus and the Representative's Warrants to be granted to the
Representative, there will be outstanding Founders Warrants for the purchase of
up to 300,000 shares of Common Stock. The exercise price with respect to
Founders Warrants is $4.50 per Share and the Warrant exercise period concludes
five years from the Effective Date. The shares of Common Stock issuable upon
exercise of the 300,000 Founders Warrants have been registered contemporaneous
to the registration of the Common Stock and Warrants being offered hereby but,
to the extent that such Warrants are exercised during the 15 month "lock-up"
period relating to the restriction on the transfer of certain outstanding Common
Stock of the Company, such restrictions on transfer shall be applicable to such
Common Stock. The Company has also reserved 375,000 shares of Common Stock for
issuance in connection with a Stock Option Plan which it anticipates will be
adopted subsequent to the conclusion of the sale of the Common Stock and
Warrants offered hereby. With respect to such Founders' Warrants and any holders
of stock options subsequently granted, the holders of such Warrants and options
may be afforded at a relatively nominal cost, the opportunity to profit from a
rise in the market price of the Common Stock of the Company. Additionally, while
such Founders' Warrants and options are outstanding, the terms pursuant to which
the Company may obtain additional required capital may be adversely affected
since the holders of such Warrants and options may be expected to exercise such
Warrants and options at a time when the Company could obtain needed capital by
an offering of securities on terms more favorable than those provided by such
Warrants or options. See "PRINCIPAL STOCKHOLDERS".
No Foreseeable Dividends. The Company does not anticipate paying dividends
with respect to its outstanding Common Stock in the foreseeable future time. See
"DIVIDENDS".
17
<PAGE>
USE OF PROCEEDS
The net proceeds of this offering of Common Stock and Warrants is expected
to be approximately $5.5 million or $6.4 million if the Over-Allotment Option is
exercised in full. The table set forth below reflects the utilization of the net
proceeds of this offering by the Company and information is set forth in the
following paragraphs on the stated uses.
Upon the Sale of 1,500,000
Shares and 3,000,000 Warrants(1)
--------------------------------
Item Amount %
----- --------
Acquisition &
Development of
Properties $2,300,000 41.9%
Debt Reduction:
12% Secured Note(2) $750,000 13.6%
Accrued Salaries(3) $573,000 10.4%
Unsecured Debt(4) $958,000 17.4%
Secured Debt $319,000 5.8%
Marketing & Advertising $100,000 1.8%
Working Capital $500,000 9.1%
---------- ----
Total $5,500,000 100%
========== ====
(1) If the over-allotment option is exercised in full, of the additional
proceeds $300,000 will be used for debt reduction and the remainder of $600,000
will be used as working capital.
(2) This payment of $750,000 will benefit Messrs. Deutsch, Farkas and Messina
since they have personally guaranteed the Note. See "Debt Reduction" below.
(3) Payable to Messrs. Deutsch, Farkas and Messina. See "Debt Reduction" below.
(4) Of the total, $551,000 is payable directly to affiliates of the Company and
$125,000 is payable for the benefit of an affiliate. See "Debt Reduction" below.
(5) Payable to affiliates of the Company. See "Debt Reduction" below.
- --------------------------------
Acquisition and Development of Properties. The Company intends to use a
portion of the net proceeds from the offering to purchase and develop land and
lots for ultimate sale to residential home builders, including development of
off-site infrastructure. Off-site infrastructure costs include entry
18
<PAGE>
monumentation, collector roads adjacent to and within the projects, culverts,
bridges, and main line utilities for water, sanitary sewer and storm sewer. In
certain projects, improvement districts or building authorities have been
created for reimbursement of major infrastructure costs. Upon issuance of bonds
or other debt obligations, the Company will be entitled to a reimbursement of a
portion of these costs. The Company presently has two property locations under
contract and identified for future purchase, both of which are owned by the
Company and non-affiliated parties. It is anticipated that approximately
$1,200,000 of the $2,300,000 of proceeds allocated to property acquisition and
development will be used on these two properties. Although there are no present
plans or arrangements for the purchase of any other known or specific
properties, it is possible that some or all of the rest of these allocated
proceeds may be used to purchase properties in which affiliates have an
interest. See "CERTAIN TRANSACTIONS".
Debt Reduction. The Company will use approximately $750,000 for repayment
of its outstanding 12% Secured Promissory Notes which would benefit Messrs.
Deutsch, Farkas and Messina since they have guaranteed payment of the Note. The
$573,000 in accrued salaries will be paid to Messrs. Deutsch, Farkas and
Messina. Of the $551,000 in unsecured debt to be paid to affiliates, $251,000 is
due in 1998 and bears interest at 10% and the balance is due June 15, 1998 and
bears interest at 15%. The $319,000 of secured debt to be paid to affiliates is
due during 1998 and bears interest ranging from 8% to 12%. The $125,000 of
unsecured debt to be paid for the benefit of an affiliate bears interest at 15%
and is due February 15, 1998 subject to a three months renewal right. The
unsecured debt of $282,000 to be paid to non-affiliated parties is for loans due
in 1998 with interest rates ranging from 13% to 15% and in one case (principal
of $80,000) at the prime rate plus 2%. The proceeds of these debt obligations
were used for property acquisitions, property development and operating
expenses. See "MANAGEMENT - Employment Agreements".
Marketing and Advertising. The Company intends to utilize a portion of the
net proceeds to increase its marketing and advertising activities with respect
to its Master Planned Communities. The Company intends to develop lots for sale
to residential home builders and its marketing program is intended, at least in
part, to augment the marketing and advertising already undertaken and conducted
by such residential home builders.
Working Capital and General Corporate Purposes. The balance of the net
proceeds realized by the Company from the offering will be utilized for working
capital and general corporate purposes. Such utilization will include the
payment of the costs and expenses incurred in connection with the Company's
operations. Such utilization may also include the capitalization of joint
ventures in which the Company may engage or for the initiation of compatible
business activities or acquisition transactions, none of which are identified as
of the date of this Prospectus. The Board of Directors will make all allocation
of proceeds utilized as working capital.
The management of the Company is of the opinion that the net proceeds from
this offering of Common Stock and Warrants, and proceeds realized from the
on-going sale of platted, semi-finished and finished lots will be sufficient to
meet the Company's anticipated cash needs and finance its operations for at
least 12 months from the date of this Prospectus. However, no assurance can be
given that the Company will not require additional financing or if such
additional financing is required, that such will be available in amounts and
upon terms acceptable to the Company.
The proceeds not immediately required for the purposes set forth above
will be invested in United States Government securities or other minimum risk,
short-term interest-bearing investments; provided, however, that the Company
will attempt not to invest the proceeds in a manner which may result in the
Company being deemed to be an investment company under the Investment Company
Act of 1940.
19
<PAGE>
SELECTED FINANCIAL INFORMATION
------------------------------
The following selected financial data for the years ended December 31, 1995 and
1996 for Gateway LLC, the two years ended December 31, 1995 and 1996 for the
Company (including its predecessors, Gateway American Properties Corporation, a
Florida corporation and Apollo III, Inc., for the period from January 12, 1995
(date of inception) through September 30, 1997 are derived from the financial
statements of each respective company. The financial data for the nine month
periods ended September 30, 1997 and 1996 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals for each company considered necessary
for a fair presentation of the financial position and results of operations for
these periods. Operating results for the nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1997. The data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information included herein.
The pro forma selected financial data as of September 30, 1997 and for the
year ended December 31, 1996 and the nine months ended September 30, 1997 are
derived from the unaudited pro forma condensed balance sheet and statements of
operations set forth subsequently in this Prospectus, which give effect to the
Transaction in the manner described in the notes to the pro forma condensed
financial statements. The pro forma selected financial data presented below and
the pro forma condensed financial statements should be read in conjunction with
the accompanying notes to the pro forma condensed financial statements, the
historical financial statements and the notes of each of the respective
companies, all of which are included subsequently in this Prospectus. The
unaudited pro forma condensed statements of operations are not necessarily
indicative of future operations or the actual results that would have occurred
had the Transaction been consummated at the beginning of each period presented.
Gateway American Properties, LLC
(a Colorado limited liability company)
Consolidated
Year Ended Nine month period
December 31, Ended September 30,
------------ -------------------
1995 1996 1996 1997
------ ------ ------ ------
Statement of Operations
Data:
Sales $4,375,359 $10,500,606 $6,836,345 $6,746,545
Gross Profit(1) 628,074 951,526 758,598 1,393,114
Operating Income 38,169 160,004 224,196 602,038
Net Income 9,748 109,444 171,417 523,346
December 31, September 30,
1996 1997
----------- ------------
Balance Sheet Data:
Total Assets(2) $18,936,406 $24,201,053
Debt(2) 18,375,162 23,243,506
Members' Equity 404,298 846,144
20
<PAGE>
Gateway American Properties, Corp.
(A Florida Corp.)
Year Ended Nine month period
December 31, Ended September 30,
------------ ------------------
1995 1996 1996 1997
------ ------ ------ ------
Statement of Operations Data:
Sales $ -0- $-0- $ -0- $ -0-
Gross Profit -0- -0- -0- -0-
Operating Loss (173,966) (464,846) (44,965) (16,970)
Net Loss (173,996) (464,846) (44,965) (16,970)
December 31, September 30,
----------- ------------
1996 1997
------ ------
Balance Sheet Data:
Total Assets $51,854 $59,852
Debt 35,798 60,766
Stockholders' Equity (Deficit) 16,056 (914)
Gateway American Properties, Corp.
(A Colorado Corp.)
Inception
Through
September 30, 1997
------------------
Statement of Operations Data:
Sales $ -0-
Gross Profit -0-
Operating Income (Loss) -0-
Net Income (Loss) -0-
September 30,
1997
======
Balance Sheet Data:
Total Assets $ 100
Debt -0-
Stockholders' Equity $ 100
21
<PAGE>
Unaudited Pro Forma Selected Financial Data
Giving Effect to the Transaction
Year Ended Nine months
December 31, Ended September 30,
1996 1997
------ ------
Income Statement Data:
Sales $10,500,606 $6,746,545
Gross Profit(1) 951,526 1,393,114
Operating Income (Loss) (306,730) 584,973
Net Income (Loss) (386,802) 303,876
Net Income (Loss) per Common Share(2) (.10) .13
As adjusted for
September 30, 1997 Offering
------------------ --------
Balance Sheet Data:
Total Assets(3) $24,261,005 $27,147,255
Debt(3) 23,304,272 20,704,272
Stockholders' Equity 845,330 6,331,580
- ------------
(1) Gross profit is defined as total sales less cost of sales.
(2) Net income per common share reflects the 1,500,000 Shares that will be
outstanding after the consummation of the Transaction and the offering
described in this Prospectus which will occur in conjunction with and as a
part of the Transaction. These income calculations do not give any effect
to the proceeds that will be received pursuant to the offering described in
this Prospectus.
(3) Consistent with industry standards, assets and liabilities are not
classified as either current or long term and, therefore, information
relating to such classifications is not presented.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In General
The Company, on and after the Effective Date, will continue the business
operations of Gateway LLC, directly or through Gateway LLC. Gateway LLC is a
Colorado limited liability company formed in June, 1994. In December, 1994, GV
Development, LLC, a Colorado limited liability company formed in June, 1993, was
merged into Gateway LLC. The business of GV Development, LLC, was similar to the
business of Gateway LLC and was under control of substantially the same members.
Consequently, GV Development, LLC, is treated as a predecessor of Gateway LLC
and all references to Gateway LLC in this Prospectus and the financial
statements included herein include the activities of GV Development, LLC.
Gateway LLC acquires suitable real estate properties for development as platted,
semi-finished or finished residential building lots intended primarily for sale
to home builders who intend to construct on such lots single or multi family
residential structures for sale to the ultimate occupant. Gateway LLC also
engages in home construction and related marketing activities. See "SUMMARY" and
"BUSINESS".
The Company's and Gateway LLC's income has been previously derived from the
sale of platted, semi-finished or finished lots to home builders at lot prices
usually determined at the time that the Company commences development of the
lots. The Company's and Gateway LLC's profits have been derived as a result of
the difference between the gross selling price of the lots sold to various home
builders and the cost of such lot acquisition and the development activities
undertaken by Gateway LLC. It is anticipated that the Company's income will
continue to be substantially derived from the sale of lots as described above.
Income may also be derived from other business, including the home building
business. The entire process relating to Gateway LLC's development activities is
largely driven by the ultimate price of the home to the dwelling occupant. The
ultimate price of the lot is substantially controlled by such factors as market
demand, location, dwelling size and quality, type and extent of common
development amenities and aesthetic considerations. Factors which affect the
home building industry in a more general way, such as the level of long and
short term interest rates, relative availability of development and long term
financing, local and national economic conditions and competition, will also
reflect the amount of the ultimate price of the residential building lot to the
dwelling occupant.
In the light of such environment, Gateway LLC undertakes analysis with
respect to any real estate property being considered for acquisition and/or
development. Considerations and factors utilized in such analysis include the
formulation of development cost budgets with respect to required on site and off
site development, estimates of the cost and time required to accomplish required
regulatory matters (zoning, permitting, etc.), the level of interest on the part
of home builders to whom the Company has sold lots in the past and the
determination of the ultimate home price to the home buyer which in most cases
is provided as a result of an independent appraisal of the property in its
undeveloped state and of the projected value of the lots to be developed on the
property, assuming the completion of development activities.
Gateway LLC's residential lot acquisition and development activities have
been concentrated in the greater Denver, Colorado metropolitan area and in Fort
Collins, Colorado. Such concentration is expected to continue during the near
future time. It is the Company's intention to provide lots to builders who will
build homes selling in the $100,000 to $200,000 price range. This price range
represents a significant share of the metro Denver and Ft. Collins markets. See
"BUSINESS - The Residential Home Building Industry".
23
<PAGE>
Historically, a substantial amount of Gateway LLC's lot sales have been
made to PrideMark Homes ("PrideMark"), an affiliate of the Company (PrideMark is
owned by Michael A. Messina, an officer, director and principal shareholder of
the Company). During the period from January 1, 1995 through September 30, 1997
68% of the finished and semi-finished lots sold by the Company were sold to
PrideMark. The Company has implemented and is continuing a plan to expand its
customer base. The number of home builders under contract to purchase lots from
the Company has increased from four at January 1, 1996 (including PrideMark) to
eight as of the date of this Prospectus; namely, Melody Homes, US Home
Corporation, PrideMark Homes, Continental Homes, Meadow Homes, Inc., Strauss
Homes, Sundown Development, Inc., and Odyssey Homes.
As of September 30, 1997, the Company had contracts for builders to
purchase lots in excess of $12,000,000 market value. Since September 30, 1997 to
the date hereof, the Company executed additional contracts with builders which
bring the Company's total market value of outstanding contracts to in excess of
$15,250,000. These contracts call for lot delivery from 1997 through the year
2000. These contracts are subject to the Company's ability to deliver the lots
and the financial ability of the various purchasers to purchase them. Of the
outstanding lot sale contracts as of the date of the Prospectus, the contracts
with PrideMark involve approximately 20%.
Results of Operations
The results of operations of Gateway LLC for the year ended December 31,
1995 compared to the year ended December 31, 1996 and for the nine month period
ended September 30, 1996 compared to the nine month period ended September 30,
1997.
Gateway LLC (including its predecessor, GV Development, LLC) commenced
operations on June 24, 1993.
For the year ended December 31, 1995, Gateway LLC experienced sales of
$4,375,359, of which, $2,800,535 were to related parties. See "CERTAIN
TRANSACTIONS". Cost of sales were $3,747,285 and general and administrative
expenses were $589,905, resulting in an operating income of $38,169.
For the year ended December 31, 1996, Gateway LLC experienced sales of
$10,500,606, of which, $7,901,928 were to related parties. See "CERTAIN
TRANSACTIONS". Cost of sales were $9,549,080 and general and administrative
expenses were $791,522, resulting in an operating income of $160,004.
Sales for 1996 represent an increase of 139% over sales for 1995, as
Gateway LLC opened new subdivisions. Additionally, the maturation of existing
subdivisions contributed to Gateway LLC's sales increases. Cost of sales in 1996
were approximately 91% of sales, compared to approximately 86% in 1995 primarily
as a result of additional start-up and infrastructure costs for Gateway LLC's
subdivisions and amortization of financing costs related to Gateway LLC's
private placements. General and administrative expenses increased by $201,617
from 1995 to 1996 representing primarily increases in staffing for Gateway LLC's
expansion and amortization of loan fees related to Gateway LLC's private
placement. However, as a percentage of sales, general and administrative
expenses decreased from 13.5% of sales in 1995 to 7.5% in 1996, reflecting many
costs which do not increase in relationship to sales, including, salaries, rent,
employee benefits and other fixed costs.
24
<PAGE>
For the nine month period ended September 30, 1996, Gateway LLC experienced
lot sales of $6,836,345 of which $4,531,383 were to related parties. See
"CERTAIN TRANSACTIONS". The costs of such lot sales for the nine month period
ended September 30, 1996, were $6,077,747 which, when taken with general and
administrative expenses of $534,402, resulted in an operating income of
$224,196.
For the nine month period ended September 30, 1997, Gateway LLC experienced
lot sales of $6,746,545 of which $4,485,601 were to related parties. See
"CERTAIN TRANSACTIONS". The costs of such lot sales for the nine month period
ended September 30, 1997, was $5,353,431, which, when taken with general and
administrative expenses of $791,076, resulted in an operating income of
$602,038.
Sales for the first nine months of 1997 decreased by approximately 1%.
Development activity during the period ended in 1997 was greater than in 1996,
as evidenced by the increase in land under development of approximately
$21,544,000 in 1997 compared to approximately $14,735,000 in 1996. Lot
completion is running slightly behind 1996, however management anticipates that
closings will occur during the last three months of 1997, which will result in
sales for 1997 to be approximately the same as compared to 1996.
Cost of sales for the nine months ended September 30, 1997 decreased by
approximately $724,000 as compared to the nine months ended September 30, 1996,
or from 88% of sales in 1996 to 79% of sales in 1997. The primary reasons for
the decrease are certain bulk sale transactions of partially developed land.
General and administrative expenses increased by $256,674 during the nine months
ended September 30, 1997, as compared to 1996, primarily as a result of
increases in car allowances of $82,000 and wages of $96,000 due to management,
legal and professional fees of $43,000 and other office expenses of
approximately $36,000.
The results of operations of Gateway American Properties Corporation, a Colorado
Corporation, which consists of its predecessors Gateway American-Florida, and
Apollo III, Inc. but not Gateway LLC, a Colorado limited liability Company, for
the year ended December 31, 1995 compared to the year ended December 31, 1996
and for the nine month period ended September 30, 1996 compared to the nine
month period ended September 30, 1997.
For the years ended December 31, 1995 and 1996, respectively, the Company
experienced an operating loss of $185,472 and $466,734 and had interest income
of $11,476 and $1,888 respectively. It experienced a net loss of $173,996 for
the year ended December 31, 1995 and a net loss of $464,846 for the year ended
December 31, 1996. The Company sustained an operating loss of $46,456 and
$17,065 for the nine month periods ended September 30, 1996 and 1997 and had
interest income of $1,491 and $95, resulting in a net loss of $44,965 and
$16,970 for the nine months. The Company and its named predecessors were a
development stage company. Their consolidated losses arose primarily because of
start-up or pre-acquisition activities.
Liquidity and Capital Resources
Gateway LLC financed its lot acquisition and development activities through
the proceeds derived from the capital contributions made by the members of
Gateway LLC, through the net proceeds realized from the sale of platted,
semi-finished and finished lots, and through the net proceeds realized by
Gateway LLC as a result of the private and limited offer and sale of certain
debt securities. The continuing operations of the Company and Gateway LLC will
be financed through a portion of the net proceeds of the offering made hereby,
See "USE OF PROCEEDS" through the proceeds from the sale of lots, through bank
loans and possibly through the private sale of debt securities.
At September 30, 1997, the holders of the outstanding membership interests
of Gateway LLC had contributed (net of distributions) cash and property to
Gateway LLC in the amount of $136,448.
25
<PAGE>
From Gateway LLC's inception through the period ended September 30, 1997
Gateway LLC sold its 12% Secured Promissory Notes as follows: principal amount
of $6 million, due September 30, 1996, principal amount of $3 million due April
30, 1997; and principal amount of $4 million due September 30, 1999 (the
"Notes"). For further information concerning such Notes, see "CERTAIN
TRANSACTIONS". As of September 30, 1997, the $6 million Note due September 30,
1996 and the $3 million Note due April 30, 1997 have been paid in full. The Note
due September 30, 1999 ("Note") is outstanding and a principal payment of
$500,000 was due December 31, 1997 and an additional $500,000 will be due at the
end of each calendar quarter thereafter with any unpaid balance due September
30, 1999. The December 31, 1997 payment was timely made. The Company will pay a
total of $750,000 on the principal of the Note from the proceeds of the offering
and the balance will be paid from funds from operations or debt financing. On
the Effective Date, the Company will unconditionally assume the obligation of
Gateway LLC with respect to the Note. The principal obligation of the Note is
unconditionally guaranteed by Harvey E. Deutsch, Joel H. Farkas and Michael A.
Messina. See "MANAGEMENT". The Company has agreed to indemnify Messrs. Deutsch,
Farkas and Messina from and against any liability, cost or expense incurred by
them under any loan or obligation obtained by or for the benefit of the Company,
including their guarantees of the Note.
The Note was issued under the authority of and is subject to the provisions
and terms of a loan agreement existing between Gateway LLC, Phillips & Tober,
Inc., the placement agent for the Note, and MegaBank of Arapahoe (the "Agent"),
a deposit institution maintaining its offices in Denver, Colorado. MegaBank of
Arapahoe acts as agent with respect to the Note and acts in the collective
benefit of the holders of the Note. The Note was privately offered and sold by
Gateway LLC through the facilities of Phillips & Tober, Inc., as placement
agent, to suitable and "Accredited Investors" (as defined under the Securities
Act of 1933) on the basis of $100,000 units of participation in the Note.
Interest of approximately $40,000 is paid monthly at the rate of 12% on the
Note. The Agent is required to undertake certain notice and corrective action in
the event that default occurs with respect to the payment of any interest or
principal payment when due.
The obligation represented by the Note is secured by deeds of trust
(mortgages) encumbering various real estate parcels and projects with which
Gateway LLC is involved. The deeds of trust have a first priority status,
subject only to certain exceptions as are set forth in the governing loan
agreement, which exceptions include development agreements which may be entered
into between Gateway LLC and certain cities and counties where the encumbered
projects are located, and other existing matters of record. The Agent, as
nominee and agent for the Note and the holders of the units of participation
therein, is the beneficiary of such deeds of trust.
The properties to which the deeds of trust relate are comprised of platted,
semi-finished lots or lots in the process of being platted. In order for lots to
become finished lots, Gateway LLC is obligated to accomplish certain development
activities, including providing access to all utilities with a capacity to
service the lots in question, providing ingress and egress to and from public
roads and otherwise making the lots fully qualified for the issuance of building
permits for the construction of a residential dwelling on a lot or lots. Upon
the completion of these activities, the lots are available for sale to
purchasers.
Gateway LLC must also meet certain obligations in order for the Agent to
disburse Note proceeds for the acquisition of any particular parcel which
Gateway LLC intends to acquire and develop into platted, finished or
semi-finished lots. Unless waived by the agent, such requirements include the
requirement that (a) the parcel be zoned and platted, (b) there is a mortgagee
title insurance policy in the amount of the appraised value of the parcel and
insuring the priority of the lien of the deeds of trust which is available and
is being delivered, (c) there is evidence of ingress and egress via finished
public roads and (d) there is available capacity for service from and access to
all necessary and required utilities.
26
<PAGE>
As of the Effective Date, Gateway LLC is in full compliance with the
requirements of the loan agreement and the Company and Gateway LLC believes that
compliance will continue.
Gateway LLC has also historically utilized bank lines of credit and
financing proceeds made available by certain affiliates. At September 30, 1997,
Gateway LLC had aggregate outstanding debt of approximately $17.1 million in
addition to the $4 million on the Note described above. Such additional loans
have various interest rates, terms and maturities. See Note 3 to the
consolidated financial statements of Gateway LLC included elsewhere in this
Prospectus. The only presently open line of credit of Gateway LLC is with a
non-affiliated bank in the amount of $100,000.
The Company believes that the funds made available from the sources
described above and those anticipated to be received by the Company as a result
of the conclusion of the offering of Common Stock and Warrants made hereby,
together with anticipated cash flows to be derived from the sale of platted,
semi-finished or finished lots, will be sufficient to meet Gateway LLC's and the
Company's liquidity requirements during the 12 months following the date of this
Prospectus. To the extent that such sources of funds are insufficient, Gateway
LLC and the Company will be required to seek additional sources of funds and
there can be no assurance that Gateway LLC and the Company will be able to
procure additional funds on acceptable terms or will be able to procure
additional funds at all.
The acquisition and lot development activities of Gateway LLC and the
Company are affected to a certain degree by weather conditions, availability of
necessary materials and labor, and other factors which can fluctuate on a
seasonal basis. Generally, the lot development activities must be conducted
under favorable weather conditions and adverse weather conditions can interrupt
or cause a temporary cessation in such activities. Delays, when encountered, may
diminish or eliminate the anticipated profit margin with respect to any lot
project then being conducted.
Gateway LLC and the Company may experience fluctuations in future
operations as a result of a number of factors, including local and general
economic conditions, the cyclical nature of the real estate market, the economic
health of the Company's home builder customers, the relative availability of
suitable real estate parcels for development into residential lot subdivisions,
the availability of development and long term financing for home builders and
the purchasers of residential dwellings, governmental policies and regulations,
weather, shortages of labor or materials, increases in on-site and off-site
development costs, and other factors. See "RISK FACTORS - Factors Affecting
Business of the Company".
The Company has employment agreementss with its three executive officers,
Messrs. Deutsch, Farkas and Messina The Agreements are all on similar terms
except salary rates. Mr. Deutsch will receive a salary of $120,000 per year and
Messrs. Farkas and Messina will receive $108,000 each. The initial term of the
agreement runs through December 31, 2000. For additional information on the
Company's obligations under the agreements, See "BUSINESS - Employment
Agreements".
27
<PAGE>
DILUTION
The pro forma information and data presented in this Prospectus section
assumes the consummation of the Transaction. Accordingly, such information and
data regarding existing stockholders of the Company takes into account the
consideration paid by Gateway LLC members for their membership interests in
Gateway LLC and the consideration paid by the other present stockholders for
their shares. See "INTRODUCTORY STATEMENT" and "CERTAIN TRANSACTIONS". The pro
forma net tangible book value of the Common Stock at September 30, 1997,
assuming the Transaction occurred but without giving effect to sale of Common
Stock and Warrants in this offering, was $478,981 or $.20 per share. Net
tangible book value per share of Common Stock is defined as the tangible assets
of the Company, less all liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect as of September 30, 1997 to the sale of
the 1,500,000 shares of Common Stock offered hereby and after deducting the
unpaid estimated offering expenses, the pro forma net tangible book value of the
Common Stock at September 30, 1997 would have been $6,045,231 or $1.57 per
share. This represents an immediate increase in net tangible book value of $1.37
(34.25%) per share to existing stockholders and an immediate dilution of $2.43
(60.75%) per share to new investors purchasing the Shares offered hereby. The
following table illustrates this per share dilution in relationship to the
public offering price:
Amount Percent
Initial public offering price $4.00 100%
Pro forma net tangible book value per share
before offering .20 5%
Increase in pro forma net tangible book value
per share attributable to new investors 1.37 34.25%
----- ------
Pro forma net tangible book value per share after
giving effect to public offering $1.57 39.25%
===== ======
Dilution per share to new investors $2.43 60.75%
===== ======
Neither the foregoing nor the following table gives effect to the exercise
of any of the Warrants to purchase of 4,125,000 of Common Stock included in the
3,000,000 Warrants offered hereby, the outstanding 300,000 Founders Warrants,
the 450,000 Representative's Warrants and the 375,000 options which may be
issued pursuant to a stock option plan subsequently adopted by the Company.
These two tables also do not give effect to the use of the Over-Allotment Option
granted to the Underwriters under which they may purchase up to an additional
225,000 shares of Common Stock and Warrants to purchase 450,000 shares.
The following table summarizes, on a pro forma basis as of September
30, 1997, the total shares of Common Stock purchased and the total consideration
and average price per share paid by existing stockholders and paid by the new
investors purchasing the shares offered hereby without giving any effect to the
$562,500 paid by new investors for the Warrants.
Shares Purchased Total Consideration(1)
---------------- ----------------------
Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
New investors 1,500,000 38.9% $6,000,000 87.7 $ 4.00
Existing stockholders 2,352,000 61.1% $ 845,330 12.3 .36
--------- ----- ---------- ------
Total 3,852,000 100.0% $6,845,330 100.0%
========= ===== ========== ======
(1) Does not include the $562,500 paid by new investors for the Warrants.
28
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PRO FORMA CAPITALIZATION
The table set forth below presents the pro forma capitalization of the
Company as of September 30, 1997 which takes into account the consummation of
the Transaction, including the sale of the 1,500,000 shares of Common Stock and
3,000,000 Warrants offered hereby. See "INTRODUCTORY STATEMENT" and "CERTAIN
TRANSACTIONS".
September 30, 1997
---------------------------
Prior to
Consummation As Adjusted
of Offering for Offering
Debt $23,304,272 $20,704,272
----------- -----------
Stockholders' Equity:
Common Stock, $.01 par value,
20,000,000 Shares authorized,
2,352,000 Shares outstanding
on a pro forma basis prior to
consummation of the offering
and 3,852,000 Shares outstanding
on a pro forma basis as adjusted
for this offering 23,520 38,520
Additional Paid-in Capital 817,810 6,289,060
Founders Warrants 4,000 4,000
Retained Earning -0- -0-
---- ----
Total Stockholders' Equity 845,330 6,331,580
------- ---------
Total Capitalization $24,149,602 $27,035,852
========== ==========
- -----------------
DIVIDEND POLICY
The Company does not expect to pay dividends on its Common Stock during
the foreseeable future time. Any future decision of the Company's Board of
Directors to pay dividends will be made in the light of the Company's earnings,
financial position, capital requirements and other relevant factors then
existing.
29
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BUSINESS
Introduction
Gateway LLC has primarily engaged in the furnishing of platted,
semi-finished and unfinished lots to the home building industry since its
inception in June, 1993. Its activities have been concentrated in eight cities
and counties in the greater Denver metropolitan area and in the City of Fort
Collins, Colorado. The Company will continue the business activities of Gateway
LLC, either directly or through Gateway LLC, which is expected to continue as a
subsidiary entity of the Company for a now indeterminable period. The management
of the Company does not believe that the present is an appropriate time to make
a definite decision whether or not to continue operating Gateway LLC as a
subsidiary or to merge it into the Company or liquidate its assets and
operations into the Company and conduct all future operations directly out of
the Company. The title to the real properties involved in the present operations
is held in Gateway LLC; and the loan or financing arrangements with respect to
the properties are with Gateway LLC. Company's management presently intends that
future development projects will be acquired directly in and operated by the
Company and that operations out of Gateway LLC will be phased out as the
projects are developed and the properties sold. However, they do not presently
know if there may be future advantages in continuing substantial operations in
Gateway LLC. Accordingly, the information presented below in this Prospectus
section of the activities of the Company, and all references to the Company,
from and after the Effective Date include the activities of Gateway.
The Company's business activities are the outgrowth of the business
activities of Harvey E. Deutsch, Joel H. Farkas and Michael A. Messina, which
involved the acquisition and development of real property to the status of
residential building lots for sale to and use by PrideMark. PrideMark is a
Denver, Colorado based residential home builder controlled by Michael A.
Messina, who is also a director, officer and principal shareholder of the
Company. See "CERTAIN TRANSACTIONS" and "MANAGEMENT". Such activity assisted
PrideMark in assuring an adequate supply of suitable, developed residential lots
for use in the home construction activity of PrideMark without an immediate
requirement that PrideMark contemporaneously commit its capital to the lot
development process.
From this activity, the present business activity of the Company has
developed which involves the acquisition and development of land as residential
subdivisions containing platted, finished or semi-finished building lots
suitable for acquisition, usually on a phased basis, by the residential
production home builders who are or become customers of the Company. Finished
lots are lots as to which all required subdivision improvements have been
completed and which have adjacent access to all utilities with capacity to serve
the lots, have a means of ingress and egress over public roads, and are fully
qualified for issuance of a building permit for construction of a home on the
lot. Semi-finished lots are lots with respect to which subdivision improvements
for utilities, ingress and egress and other required improvements have been
completed to or through a portion of the subdivision, but such improvements have
not been completed to each lot itself. The home builder completes the
development of semi-finished lots into finished lots, in connection with its
construction of homes thereon. From time to time, Gateway also sells parcels of
real property that have been zoned and platted, but are substantially
undeveloped, to home builders. The Company may, from time to time, may also
engage in the home building business.
Presently the home builders who have acquired lots, or are presently under
contract to acquire from the Company are PrideMark Homes, US Home, Melody Homes,
Sheffield Homes, Continental Homes, Sundown Development, Paul Adam Custom Homes,
d/b/a Odyssey Homes, Meadow Homes and Strauss Homes. Substantially all of the
lots developed to date by Gateway LLC have been intended for use for single
family residential production homes and townhomes or duplexes.
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The Residential Home Building Industry
The residential home building industry has three primary components: land
acquisition, land development, and home construction and sales. There is
considerable overlap among those who participate in one or more of the
components of the industry. Investors purchase undeveloped or under utilized
real estate with a view to realizing appreciation in value as a result of urban
or suburban growth, but usually do not engage in development activities.
Developers, such as the Company, typically purchase real property which is
usually unimproved and unplatted but is appropriately zoned for development and
develop such property into subdivisions containing platted, semi-finished or
finished lots for sale to home builders. Home builders either acquire finished
lots or acquire and develop land into finished lots for their own home building
activities.
In the home construction and sales component of the industry, there are
four major areas of activity: (i) building custom homes; (ii) building
production homes; (iii) building town homes, condominiums and apartments; and
(iv) remodelings. Smaller home builders generally concentrate their activities
in two or three of these areas while larger home builders tend to have
operations in almost all activity areas. Home builders classified as production
home builders dominate the market. A production home builder builds a
substantial number of homes each year from standard plans and specifications
that have limited structural options but generally offer various floor plans,
elevations or upgrade options.
The activities of Gateway LLC to date have been concentrated in the greater
Denver, Colorado metropolitan area and the City of Fort Collins, Colorado, and a
significant portion of the Company's activities during the future time are also
expected to be concentrated in these areas.
Denver is the capital city of the State of Colorado and the Denver
metropolitan area is the principal economic center of the Rocky Mountain region.
The metropolitan Denver area is comprised of six counties: Denver, Adams,
Arapahoe, Boulder, Douglas and Jefferson. The City of Fort Collins is located in
northern Colorado along the eastern slope of the Rocky Mountains. It is the
largest city of the northern Colorado region and the seat of Larimer County. Ft.
Collins is located 65 miles north of Denver via Interstate Highway No. 25 and 30
miles south of the Wyoming border.
The management of the Company believes, based upon information available to
the Company and believed reliable, that the residential construction industry in
the Denver, Colorado metropolitan area and in the City of Fort Collins is very
fragmented with many individual businesses that have small dollar or unit sales
volumes. The Denver metropolitan area also is characterized, however, by the
presence of several large production home building companies that construct the
majority of single family homes in the area. The Company believes that for the
nine month period ending September 1997, the largest ten home builders in the
metropolitan Denver, Colorado area constituted approximately 67% of the single
family home construction activity that occurs in the area during such period.
The residential home building industry in the Denver, Colorado metropolitan
area has experienced dramatic changes during the period 1975-1996. In the late
1970's and early 1980's, the Denver metropolitan area experienced rapid growth
and substantial residential construction activity. The period 1985-1989 was
characterized by deteriorating economic conditions and an increasing oversupply
of homes in the Denver, Colorado area. During this period there were record
foreclosures, bankruptcies and financial institution failures.
The demise of numerous financial institutions in the mid to late 1980's
resulted in the imposition of stringent regulatory restrictions on commercial
banks and other financial institutions engaged in real estate lending. As a
result, sources of financing became more limited and restricted. Other
regulatory factors relating to environmental concerns and concerns regarding the
pace and rate of development in the Denver metropolitan area have, in the
opinion of the Company, significantly increased the regulatory impact which is
presently experienced by firms engaged in residential home building.
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<PAGE>
Commencing in late 1989 and through the present time, economic conditions
in the Denver, Colorado metropolitan area have improved. From 1990 through
December 31, 1996, the Denver metropolitan area experienced substantial growth
in home construction and sales. For the year of 1995, sales in the Denver market
maintained a steady pace, with an increase of 16.3% over 1994. For the year
1996, sales were up 21% over 1995. For the first nine months of 1997 sales
results were also favorable at a 6.2% gain in single family starts over the same
period in 1996. The management of the Company anticipates that the rate of
economic growth in the greater Denver, Colorado metropolitan area will be at a
moderate level through 1997 as a result of various factors. The materially
adverse economic conditions characterizing the period 1985-1989 are not expected
to reoccur in the foreseeable future time. However, no assurance can be given
that favorable economic conditions will be sustained and will continue.
Until very recently, there has been very little accessible data available
regarding the volume of new home sales in the City of Fort Collins. However,
based upon the information available to the Company and believed reliable, it
appears that home sales in the City of Fort Collins generally follow the same
trend as for the Denver metropolitan area. The City of Fort Collins experienced
a period of strong growth in the late 1970's and early 1980's, a decline in home
sales in the mid 1980's, and a recovery and corresponding increase in home sales
beginning in late 1988 and 1989. Home sales for the period 1989 through 1995
exceeded those of prior years, and 1996 saw an increase of 24.2% over 1995.
Sales results for the first nine months of 1997 also show an increase of 9.3%
over the same period in 1996.
Property Acquisition by the Company
The business activities of Gateway LLC have been, and the business
activities of the Company primarily will be, the purchase of real property that
is zoned or can be zoned for residential use and the development of such
purchased property into platted, finished or semi-finished lots for sale to home
builders who will construct a single family detached or multi-family attached
homes on such lots. See Introduction above for a description of what constitutes
"platted", "finished" and "semi-finished" lots. The developed lots generally are
between 5,000 and 6,000 square feet in size and homes constructed on these lots
generally are priced between $100,000 and $250,000, including the lots. From
time to time, the Company will acquire parcels of real property, complete the
platting process and then sell the zoned and platted parcels to home builders
who will develop such properties themselves.
With respect to land acquired for immediate development into lots and as
to which the Company has a sales contract with a home builder for sale of the
finished lots, the sales price of the platted, finished or semi finished lots to
the home builder will be a significant factor in determining the price per lot
which can be paid by the Company, taking into account the development costs
which are required to be incurred by the Company prior to the lot being sold in
platted, semi-finished or finished status to the residential home builder. With
respect to land purchased for development but as to which no current sales
contract has been negotiated, an independent appraisal will be a significant
factor in determining the price per lot that will be paid by Company.
The Company seeks to maintain purchase option contracts for real estate
properties covering a four to seven year supply of lots, based upon current lot
absorption information. In that manner, the Company seeks to assure that there
are sufficient lots under its control to provide a supply for its business in
the reasonably foreseeable future. Generally, the Company will exercise options
to purchase properties at a level intended to meet its home builder customers'
demands for a two to four year period based upon sales contracts with such home
builders. In the normal course of business, the Company will purchase properties
for which there are no contracts for sale to home builders.
32
<PAGE>
The Company seeks to achieve a sales price to its home builder customers
which will yield to the Company an adequate gross margin, before selling
expenses, general and administrative expenses, financing costs and other
non-capitalized costs of the Company, taking into account the amount of money
expended by the Company for property acquisition and development of the property
as a platted subdivi sion containing finished and semi-finished lots. In its
effort to achieve such a gross margin, with respect to property intended to be
developed in the immediate future, the Company utilizes independent appraisals
to verify the fair market value of the property when acquired. For properties
that will not be developed immediately and/or for which the Company has no sales
contracts with home builder customers, the Company obtains independent
appraisals to verify the fair market value of the property upon acquisition. The
Company then uses development budget estimates and management's estimates of the
potential selling price of lots based upon management's experience with the
market and the Company's home builder customers to determine the estimated fair
market value of finished and semi-finished lots. From its organization through
December 31, 1996, the Company's lot sales have increased from fewer than 20
lots sold in 1994, to 194 lots sold in 1995, to 478 lots sold in 1996. For the
nine month period ending September 30, 1997, Gateway LLC has sold 340 lots.
A significant amount of the Company's real property purchases and sales
have previously been with affiliated parties. See "CERTAIN TRANSACTIONS". The
Company uses the same procedures and policies in determining the sales prices of
lots sold to affiliated parties as those used in setting the sales prices for
transactions with non-affiliated parties.
Present Development Activities
The development activities of the Company will include the accomplishment
of all legal and regulatory requirements for the subdivision plat and
substantial completion of the subdivision infrastructure (streets, water and
sewer systems, gas and electric lines, curb and gutter, landscaping, entry
monumentation and related improvements).
The Company is presently developing and/or platting lots for the nine home
builders, listed in Marketing of Subdivision Lots below. Since its inception,
Gateway's annual sales have increased from less than 20 lots sold in 1994 to 478
lots in 1996 to 340 lots for the first nine months of 1997. As of September 30,
1997, the Company had contracts for builders to purchase lots in excess of
$12,000,000 market value. Since September 30, 1997 to the date hereof, the
Company executed additional contracts with builders which bring the Company's
total market value of outstanding contracts to in excess of $15,250,000. These
contracts call for lot delivery from 1997 through the year 2000.
The Company's inventory of lots under development is presently contained in
subdivisions known as Sterling Hills, Aurora, Colorado; Country Hills, Thornton,
Colorado; Willow Run, Broomfield, Colorado; and Gateway Village, Denver,
Colorado; all of which subdivisions are located in the greater Denver, Colorado
metropolitan area. In addition, the Company is currently planning lots in the
Riverdale subdivision in Thornton, Colorado. Also, the Company is presently
building in Roxborough Park in Douglas County, Colorado. The West Star
Subdivision, in Lakewood, Colorado, has been platted and sold. Also, Downing
Park, Thornton, Colorado, and Quail Run, Aurora, Colorado have been developed
and sold. The Company also has lots under development in the Harmony Crossing
and Overland Trail subdivisions which are located in Fort Collins, Colorado.
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34
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Marketing of Subdivision Lots
The Company sells its platted, finished and semi-finished lots primarily to
production home builders. Production home builders are believed by the Company
to be the dominant factor in the residential home building industry as conducted
in the greater Denver, Colorado metropolitan area. The Company estimates that in
such area, the largest ten home builders constituted approximately 48% of new
home sales which occurred in the nine month period ended September 30, 1997. In
summary, a production home builder is a home builder building a substantial
number of homes each year from standard plans and specifications that have
limited structural options but generally offer various floor plans, elevation or
upgrade options.
From its inception through December 31, 1996, Gateway LLC sold or has
contracted to sell platted, finished and semi-finished lots to nine home
builders conducting their operations in the greater Denver, and Ft. Collins,
Colorado metropolitan areas. Such home builders are PrideMark Homes, US Home,
Melody Homes, Sheffield Homes, Continental Homes, Paul Adam Custom Homes, d/b/a
Odyssey Homes, Meadow Homes, Sundown Development, and Strauss Homes. From
Gateway's inception through December 31, 1994, virtually all of Gateway LLC's
lot sales were to PrideMark. For the 33 month period beginning January 1, 1995,
approximately 68% of the Company's lot sales were to PrideMark. It is
anticipated that the sales to PrideMark Homes will constitute approximately
one-third to one-half of the Company's future lot sales over the next 12 months.
PrideMark is principally owned by Michael A. Messina who also is a
principal shareholder, director and officer of the Company. See "CERTAIN
TRANSACTIONS" and "MANAGEMENT". PrideMark was formed in late 1987 and since
formation has purchased finished lots primarily from various financial
institutions. Commencing in 1992, PrideMark began developing, platting and
acquiring lots to serve its own home building needs. Homes built by PrideMark
are primarily single family homes for middle income families and range in price
from $80,000 to $200,000. The majority of homes constructed by PrideMark Homes
are in the $90,000 to $150,000 range. According to "The Front Range Housing
Market Letter" published by David Laffoon, September 1997, PrideMark was ranked
fourth among Denver area builders for new home closings for the first seven
months of 1997 and closed 390 homes during that period.
US Home was established in 1954 and is currently believed to build homes
primarily for first time home buyers and retirement second home buyers. It is
estimated that US Home has built more than 250,000 homes during the past
approximately 40 years. Presently US Home is believed to construct residential
dwelling units in approximately 200 communities in 32 metropolitan areas located
in 12 states throughout the United States, including Arizona, California,
Colorado, Florida, Maryland, Minnesota, Nevada, New Jersey, Texas and Virginia.
The management of the Company believes that US Home is one of the ten largest
single family on-site home builders in the United States. According to "The
Front Range Housing Market Letter" published by David Laffoon, September 1997,
US Home was ranked first among Denver area builders for new home closings for
the first seven months of 1997 and closed 554 homes during that period.
Melody Homes is one of the largest builders of single family detached homes
in the Denver metro area. According to "The Front Range Housing Market Letter"
published by David Laffoon, September 1997, Melody Homes was ranked third among
Denver area builders for new home closings for the first seven months of 1997
and closed 478 homes during that period.
35
<PAGE>
Continental Homes was founded in Denver in 1986 and has been the only
builder to join the ten best selling builders in the Denver metro area.
According to "The Front Range Housing Market Letter" published by David Laffoon,
September 1997, Continental was ranked sixth among Denver area builders for new
home closings for the first seven months of 1997 and closed 308 homes during
that period.
Sheffield Homes was founded in 1978 and builds single family detached
homes for the first home and move-up home buyer.
Sundown Development builds single-family detached homes for the first-time
home buyer.
Strauss Homes, LLC, founded in 1994 builds affordable housing in the
Denver metro area.
Paul Adam Custom Homes d/b/a Odyssey Homes began building in this region
in 1996 and builds single family detached homes in the Denver metro area.
Meadow Homes began in Denver in 1984 is one of the metro areas providers
of single family homes. According to "The Front Range Housing Market Letter"
published by David Laffoon, September 1997, Meadow Homes was ranked among the
top 25 Denver area builders for new home closings for the first seven months of
1997 and closed 64 homes during that period.
The Company's sales transactions involving its inventory of platted,
finished and semi-finished lots result from negotiated transactions that are
usually undertaken by the Company at a time contemporaneous or prior to the
development of such property. The sales contracts entered into between the
Company and its home builder customers are generally option contracts. In some
cases, the lot sales contracts contain specific performance provisions requiring
the homebuilder to close on the subject lots. In other cases, homebuilders have
made a deposit of funds on executed sales contracts. Under such option
contracts, home builders who are customers of the Company may only be required
to purchase a minimum number of lots at specified times and prices. See "RISK
FACTORS - Factors Affecting Business of Company, Other Operational Risks and
Market Risks".
Regulatory Factors. As part of the zoning and subdivision processes, a
developer such as the Company generally is required to agree to complete certain
improve ments to the subdivided property ("on-site improvements") which provide
service to the property, and, in some instances, improvements to neighboring
properties ("off-site improvements") which service the proposed subdivision,
before the lots will qualify for issuance of a building permit. Until a lot can
qualify for issuance of a building permit, it is not ordinarily marketable by
the Company to a home builder. The required off-site improvements can include
such matters as acquisition and completion of service roads and utilities to the
subject property, acquisition of off-site storm water drainage facilities and
dedication (or payment in lieu of dedication) of lands and improvements for
parks or other greenbelt or open space areas. On-site improvement requirements
can include completion of streets and service utilities to each lot and
completion of on-site drainage facilities, parks or open space areas. Once
installation requirements are met and building permits are issued, developers
such as the Company, in most instances are required to provide maintenance of
the improvements for a period of time following their installation (usually one
year) before the governing bodies will accept the improvements for public
maintenance. To secure the obligation to maintain, developers are required to
post collateral with the governing agencies in the form of bonds, cash or
letters of credit in a percentage of the total cost of the improvements. If more
than one developer is involved in a subdivision, the development obligations are
generally joint and several to the several developers. Sometimes such
development obligations are allowed to be phased as lots are completed and
houses built and sold, and sometimes the development obligations are apportioned
among the developers by agreement.
36
<PAGE>
Additional Capital Needs. Gateway LLC has, and the Company will have
substantial "on-site" and "off-site" improvement obligations with respect to
real property intended to be developed. The Company estimates that additional
funds will be required for the development of the platted, unfinished and
semi-finished lots intended to be acquired and developed by the Company in the
future. Such additional required funds are anticipated to be provided from the
proceeds of the offering, sales of lots in a finished state and the creation of
additional debt obligations. In the event that sufficient proceeds are not
available from those sources, lots in an unfinished status may have to be sold
at significantly reduced prices. The management of the Company is of the opinion
that the net proceeds from this offering of Common Stock and Warrants, and
proceeds realized from the on-going sale of platted, semi-finished and finished
lots will be sufficient to meet the Company's anticipated cash needs and finance
its operations for at least 12 months from the date of this Prospectus. However,
no assurance can be given that the Company will not require additional funding
or if such additional funding is required, that such will be available in
amounts and upon terms acceptable to the Company.
Competition
In the acquisition of real property suitable for development as platted,
finished and semi-finished residential building lots and the marketing of such
lots, the Company encounters significant competition from other development
entities, from home builders who conduct their own lot development activities
and from investors who compete with the Company with respect to the acquisition
of suitable sites for development. The Company's competitive position in its
industry will be largely dependent upon the ability of the management of the
Company to identify suitable sites for acquisition at a time when such sites are
not being actively pursued for acquisition by any competitive entity or person.
This will require that the Company continually investigate suitable sites for
acquisition in its areas of operation. The Company's competitive position will
also be substantially dependent upon the relative amount of capital available to
it with respect to its ability to acquire suitable real estate sites for
development as finished and semi-finished lots and to engage in the necessary
development activities within a period of time permitting the sale of platted,
semi-finished and finished lots to its lot purchase customers.
The Company's acquisition and development activities will also be affected
by the relative financial condition of its home builder customers and by the
competitive factors which affect the home building and home marketing activities
of its home builder customers. Factors such as location, relative price,
subdivision attractiveness and amenities, available home design options and
aesthetic factors may have a pronounced affect on the acceptance of homes
constructed in subdivisions which have been developed by the Company and
acquired by its home builder customers.
The management of the Company is of the opinion that: its present
competitive posture is good; it has adequate capital to pursue its business
activities; and the capital from the offering made hereby will enhance its
competitive status.
The Company's competitive position will also be affected by the general
conditions existing in the residential home building industry, as such exists in
the Company's area of operations. See "The Residential Home Building Industry",
above, and "RISK FACTORS - Factors Affecting Business of the Company".
Employees
In addition to its executive personnel and key management employees, the
Company has 12 employees, which are primarily engaged in administrative
activities. None of the employees are represented by a union and the Company has
not had any work stoppages. The Company considers its relations with its
employees to be good. See "MANAGEMENT".
37
<PAGE>
Other Activities
In addition to its land acquisition and development activities, Gateway LLC
has provided, on a fee basis, services involved in forming special districts,
building authorities and homeowners' associations relating to properties
developed by it and has performed administrative, accounting and management
services in connection with those districts, building authorities and
homeowners' associations, pending completion of the subdivision and sales of
finished lots to home builders or subdivision residents. The Company will
continue to engage in these activities conducted by Gateway LLC.
The Company is a member of a group of investors and real estate developers
that has made an unsolicited offer to purchase the former Stapleton
International Airport site in Denver, Colorado. Presently the property is owned
by the City and County of Denver ("City") and managed by a non-profit entity
(the "Stapleton Development Corporation"). The City has not yet made a
determination whether it wishes to privatize the redevelopment. If the City does
determine to privatize the redevelopment, it would determine whether the sale
would be negotiated or based upon an open bid procedure. On January 23, 1998,
the Chief Operating Officer of Stapleton Redevelopment Corporation, after a
meeting with officers of the Company, forwarded the Company a letter indicating
that the City and Stapleton Redevelopment Corporation are presently addressing
issues of demolition of existing structures, infrastructure installation,
coordination and financing and zoning issues. He indicated that Stapleton
Development Corporation would be in contact with with the Company after March
31, 1998 to schedule additional discussions. During a recent meeting with the
Stapleton Development Corporation, it was indicated to the Company that the City
and Stapleton Development Corporationmay wish to sell individual parcels
comprising less than all of the property and that they are considering a bidding
process for such sales. The Company does not yet know the location or the
acreage that would be sold, the permitted land uses for such acreage, the price,
the costs of infrastructure installation, associated demolition costs or the
other costs of development of any particular portion of the property to be
offered for sale. Because of these uncertainties, there is no way to determine
whether the Company would continue to be interested in the acquisition of all or
a portion of the property or the impact on the Company in the event of a
purchase. There is no assurance that, even in the event the City decides to sell
any or all of the property, the investment group of which the Company is a
member would be successful in any purchase efforts.
Future Activities
Subsequent to the completion of the offering made hereby, the Company will
continue to explore suitable real estate properties for acquisition and
development into semi-finished and finished lots for sale to residential home
builders. The Company will also consider opportunities to acquire and develop
non-residential properties, i.e. rental, commercial, warehouse and office, and
may engage in development, sales and leasing of such properties. Such activities
are expected to be conducted in Colorado, principally in the greater Denver,
Colorado metropolitan area, and surrounding communities such as Fort Collins.
Currently, the Company acquires most of its real estate properties for
development and sale to its home builder customers. It is anticipated that the
Company in the future may acquire a greater number of real estate properties as
long term holdings for which the Company has no immediate development plans and
no contracts for the sale of finished lots therein to home builders. Similarly,
while the Company's operations currently are conducted in Colorado, the Company
in the future may expand its operations to other states. The Company may also
engage in other activities in the real estate business or activities related
thereto.
CERTAIN TRANSACTIONS
The Transaction
Apollo III, Inc., a Florida Corporation ("Apollo") was organized on
December 23, 1992 for the purpose of acquiring or consolidating with one or more
other business entities. On January 12, 1995, Gateway American Properties
Corporation, a Florida Corporation ("Gateway American-Florida") was formed as an
affiliate of Apollo for the purpose of entering a business combination
involving; (i) the merger of Apollo into Gateway American-Florida; (ii) the
acquisition by Gateway American-Florida of all the outstanding membership
interests in Gateway LLC, a Colorado limited liability; and (iii) the
acquisition of capital fund from a public offering of securities of Gateway
American-Florida. After filing a Registration Statement with respect to proposed
public offering of Gateway American-Florida securities to be underwritten by the
Representative, the project was voluntarily delayed. Prior to the resumption of
the project, Apollo was merged into Gateway American-Florida in exchange for
274,000 shares of the Common Stock of Gateway American - Florida. Gateway
38
<PAGE>
American-Florida later redomesticated into a Colorado corporation through a
statutory merger with the Company as the surviving corporation. In this merger
the shareholders of Gateway American- Florida received 327,000 shares of the
Company's Common Stock and 300,000 Founders Warrants. Gateway American-Florida
and Apollo are both considered as "predecessors" of the Company as that term is
defined under the Securities Act of 1933, as amended. For Additional details on
the history of the Transaction, see "INTRODUCTORY STATEMENT".
The Company immediately prior to the Effective Date, and as an integral
part of the offering made in this Prospectus, consummated the Transaction
provided for pursuant to an agreement styled Amended and Restated Agreement
Providing for Sale and Exchange of Capital Stock ("Agreement") which was made
and entered into by and between the Company and Gateway LLC effective January
27, 1997. Pursuant to the provisions of the Agreement, the Company acquired all
of the outstanding membership interests of Gateway LLC which were outstanding as
of the Closing Date (as specified in the Agreement) in exchange for 2,025,000
shares of Common Stock. Of such Shares 1,822,500 were issued to Harvey E.
Deutsch, Joel H. Farkas and Michael A. Messina or members of their families. See
"MANAGEMENT" and "PRINCIPAL SHAREHOLDERS".
The shares of Common Stock and Founders Warrants of the Company issued with
respect to the merger with Gateway American-Florida and the shares of common
stock underlying the Founders Warrants have been registered pursuant to the
Registration Statement of which this Prospectus is a part are subject to certain
restrictions upon their sale. With respect to 27,000 shares of the Company's
stock, they may not be sold for 90 days from the Effective Date. The remaining
300,000 shares of the outstanding Common Stock of and the 300,000 shares
underlying the Warrants are subject to "lock-up" provisions for 15 months from
the Effective Date. In summary, the lock-up provisions affecting such shares
prohibit the holders thereof from effecting any sales transactions in the market
for such shares except upon the written consent of the Representative. The
2,025,000 shares issued by the Company in connection with its acquisition of all
of the membership interests of Gateway LLC have not been registered and
constitute Restricted Securities. As Restricted Securities, such shares may only
be sold subsequent to the time that the holders thereof have held the shares for
a period of one year, and upon compliance with certain reporting requirements
established by the Commission. See "RISK FACTORS - Shares Eligible for Future
Sale" and "DESCRIP TION OF SECURITIES".
Certain Purchase/Sale Transactions
Property Purchases from Affiliates. From its inception in June 1993 to
date, Gateway LLC has effected purchases of real estate properties which it has
developed or will develop into platted, finished and semi-finished lots from
limited liability companies and limited partnership entities in which certain of
the executive officers of the Company had an interest. In the past, it was the
practice of Messrs. Deutsch, Farkas and Messina to form limited liability
companies or limited partnerships in which they and others would have an
economic interest in order to acquire real estate properties which were in a
condition or state of development making their acquisition by Gateway LLC and
presently the Company inappropriate or premature. During the period of time that
such real estate properties were held by such entities, appropri ate and
necessary regulatory approvals and other development activities were undertaken
and if success fully accomplished, permitted the real estate properties acquired
to be qualified for purchase by Gateway LLC. The prices paid by Gateway LLC with
respect to such real estate properties purchased were determined by real
property appraisals provided by independent sources of expert appraisal or on a
negotiated basis and are believed in all respects to fairly relate to the prices
that would have been paid by Gateway LLC with respect to any transaction with a
non-affiliated person or entity. Each of these transactions was made on terms no
less favorable to the Company than could have been obtained from unrelated
parties. After the Public Offering, any purchases made by Gateway LLC from
Messrs. Deutsch, Farkas, or Messina will be 10% below the fair market value
based on independent expert appraisals.
39
<PAGE>
The table set forth below summarizes these historical acquisition
transactions.
<TABLE>
<CAPTION>
Conveying Affiliated Entity Conveying Entity Interest Approx. Approximate Approximate
Project and Property Conveyed Held by Affiliated Party Purchase Affiliate Cost Profit to
Price to of the Property Affiliated
Gateway & & Date of Party
Affiliate %Interest Date of Purchase
Purchase
- ----------------------------- ------------------------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Downing Park, LLC, Downing Harvey E. Deutsch 25% $387,000 $373,000 $104,750
Park, 132 Lots Joel H. Farkas 25% on 6-1-95 8-12-93 $104,750
Michael A. Messina 50% $405,000 on $209,500
11-14-95
PrideMark Homes, Harmony Michael A. Messina 93% $1,089,112 $1,089,113 ---
Crossing, 221 Lots 11-4-94 5-16-94
PrideMark Homes, Willow Run Michael A. Messina 93% $342,000 $342,000 ---
Filing I, Phase 2 & 3 57 Lots 4-7-95 3-21-94
6-1-95
Willow Run Holdings, LLC, Harvey E. Deutsch 1.8% $342,273 $342,273 ---
low Run II, 88 Lots(1) Joel H. Farkas 1.8% 10-21-94 12-17-93
Willow Run Holdings, LLC, Harvey E. Deutsch 1.8% $1,511,400 $922,500 $16,663
low Run IV & V, 295 Lots(1) Joel H. Farkas 1.8% 3-23-95 12-17-93 $16,663
8-8-95
5-17-96
Gateway Village, LLC, Gateway Harvey E. Deutsch 41.6% $567,800 $61,400 $210,662
Village, Filing I, 128 Lots Joel H. Farkas 41.6% 11-4-94 2-16-93 $210,662
3-8-95
Gateway Village, LLC, Gateway Harvey E. Deutsch 41.6% $778,180 $55,220 $300,750
Village, Filing II, 146 Lots Joel H. Farkas 41.6% 9-17-96 2-16-93 $300,750
Gateway Village, LLC, Gateway Harvey E. Deutsch 41.6% $687,500 $46,500 $266,650
Village, Filing III, 124 Lots Joel H. Farkas 41.6% 7-31-97 2-16-93 $266,650
Gateway Village, LLC, Gateway Harvey E. Deutsch $1,043,750 $62,625 $408,148
Village, Filing III, 167 Lots Joel H. Farkas 8-18-95 2-16-93 $408,148
PrideMark Homes, Sterling Michael A. Messina $693,750 $693,750 ---
Hills (No. 1), 75 Lots 6-26-96 5-5-95
Sterling Hills Ltd., Sterling Harvey E. Deutsch 16%(2) $576,000 $347,000 $36,640
(No. 2), 96 Lots Joel H. Farkas 16%(2) 12-12-94 12-12-94 $36,640
Michael A. Messina 16.5%(3) $37,785
612 Corporation 1%(2) $ 2,290
612 Corp., Country Hills Harvey E. Deutsch 50%(4) $541,400 $468,000 $36,700
(No. 6), 78 Lots(4) Joel H. Farkas 50%(4) 8-18-95 7-14-95 $36,700
Sterling Hills Ltd. Buyout Harvey E. Deutsch See 5 below See 5 below See 5 below
Joel H. Farkas
Michael A. Messina
</TABLE>
- --------------------
40
<PAGE>
(1) Messrs. Deutsch and Farkas each own a 32.5% shareholder interest in Wilrun
Corp. Wilrun Corp. was the beneficial owner of an 11.11% membership
interest in the conveying entity, Willow Run Holdings LLC.
(2) Messrs. Deutsch and Farkas each own 50% of the outstanding common stock of
612 Corp. 612 Corp. held 1% general partnership interest in the conveying
entity, Sterling Hills, Ltd. Messrs. Deutsch and Farkas also held a 16%
interest as limited partners in the conveying entity, Sterling Hills, Ltd.
(3) Mr. Messina's 16.5% interest in the conveying entity, Sterling Hills, Ltd.
was a limited partnership interest.
(4) Messrs. Deutsch and Farkas each own 50% of the outstanding common stock of
612 Corp., the conveying entity in this transaction.
(5) Gateway American Properties, LLC bought out Sterling Hills, Ltd. on
7-31-96 in an amount equal to partners' capital accounts with principal
payments due quarterly beginning 9-15-97:
612 Corp. received a note for $5,391.76
515 Capital " " $86,186.65
DSR LLC " " $85,202.65
Michael A. Messina " $88,882.53
As of the date of this Prospectus, Harvey E. Deutsch and Joel H. Farkas
continue to own equity interests in certain limited liability companies or
limited partnerships which may in the future convey real estate properties to
the Company for development by the Company into finished or semi-finished lots.
Such entities include those entities identified in the table presented above.
The purchase price to be paid by the Company to such entities in the event of
the purchase of real estate properties by the Company from such entities will be
largely determined, if not entirely determined and governed by fair market
appraisals provided by sources of independent expert appraisal, will be at a
price 10% below the fair market value so determined and must be approved by the
Company's independent directors.
Lot Sales to Affiliate. Also since the inception of Gateway LLC, Gateway
LLC has sold finished or semi-finished lots to PrideMark Homes, a home
construction firm substantially owned by Michael A. Messina, a principal
shareholder, director and officer of the Company. As indicated elsewhere in this
Prospectus, the prices paid by PrideMark Homes to Gateway LLC and which in the
future may be paid to the Company have or will relate to the appraised value of
such platted, finished or semi-finished lots as determined by fair market value
appraisals provided by independent sources of expert appraisal. The table set
forth below summarizes the lot sales transactions made by Gateway LLC to
PrideMark Homes which have occurred since the inception of Gateway LLC to
December 31, 1996.
41
<PAGE>
Approximate cost
# of (including Interests
Lots Price & Taxes) to Gateway.
Property Conveyed as of 12-31-96 ------ ----- --------------------
- --------------------------------
Country Hills, Filing 6, Phase 1 26 $714,086.55 $505,759.24
Downing Park, Phase 1 64 $1,537,658.22 $765,147.12
Downing Park, Phase 2 10 $215,000.00 $220,000.00
Gateway Village, Filing 1, Phase 5 45 $756,388.00 $502,747.35
Gateway Village, Filing 1, Phase 4 41 $726,923.28 $588,304.77
Gateway Village (17 Lots) 17 $212,500.00 $212,500.00
Sterling Hills, Filing 1, Phases 1 & 2 75 $1,995,337.25 $1,737,348.44
Willow Run, Filing 1, Phase 2 28 $700,698.22 $503,596.48
Willow Run, Filing 1, Phase 3 29 $726,292.42 $501,370.97
Willow Run, Filing 2 55 $1,361,250.00 $811,865.93
Quail Run 103 $1,165,086.96 $969,585.14
Competing Development Activities. Michael A. Messina, a director,
principal shareholder and officer of the Company and the principal owner of
PrideMark, is also the principal owner of Richland Development Company, LLC,
("Richland Development"), a Colorado limited liability company. Richland
Development is engaged in the same lot development business as the Company and
in the same area. Thus, Richland Development directly competes with the Company;
and an expansion of the activities of Richland Development could have a direct
impact upon the Company's future lot sales to its present largest customer.
In 1995, the Company furnished land development services to Richland
Development on a fee basis for which the Company was paid $188,475. It is not
now anticipated that the Company will furnish any services to Richland
Development in the future.
Harvey E. Deutsch, Joel H. Farkas, and Michael A. Messina also have
interest in other parcels of real property in the Denver metro area which may
compete with the Company. Norman A. Sheldon and Robert A. Lembke, directors of
the Company also engage in land development and investment activities which may
be deemed to be in competition with the Company.
Company Headquarters
As of the date of this Prospectus, the Company's administrative
headquarters are located at 9145 East Kenyon Avenue, Suite 200, Denver, Colorado
80237. Such commercial space is occupied and utilized by the Company and
consists of approximately 4,288 square feet. It is leased in accordance with a
written lease existing between Gateway LLC(now assumed by the Company) and 9145
E. Kenyon, LLC, of which Harvey E. Deutsch and Norman A. Sheldon are managers
and members. In June 1997, the Company renewed its lease for a three year period
beginning October 31, 1997. Under the terms of the new agreement, the Company is
to pay $5,773 per month for the first year with escalation clauses in years two
and three. The Company also has an agreement with the related party law firm,
whereby the law firm will reimburse the Company $1,325 per month for office
space occupied by the law firm.
42
<PAGE>
Providing of Certain Legal Services
Harvey E. Deutsch, Esq. is a shareholder and principal of the law firm of
Deutsch, Spillane & Reutzel, P.C. The firm also maintains its offices at the
same location as the Company as identified above. Since inception, the firm has
provided various legal services to Gateway LLC and will continue to provide
various legal services to the Company relating to the development activities of
Gateway LLC and the Company, which services will include permitting, zoning
matters, negotiations with municipalities and other governmental units, land
acquisition, subdivision platting and filings and similar matters. During the
past three fiscal years ending on December 31 of each year, Gateway LLC has paid
the following legal fees to the firm; $64,600 in 1994; $241,159 in 1995; and
$432,636 in 1996. For the nine month period ended September 30, 1997 the Company
had paid $178,833 for legal fees and was indebted to the firm for an additional
$392,597. Immediately subsequent to the consummation of the Transaction, Harvey
E. Deutsch is expected to devote approximately two-thirds of his business time
to the position of President and Chief Executive Officer of the Company and will
alter his position with his law firm to that of "of counsel." In all events, Mr.
Deutsch's attention to the practice of law is expected to be substantially
reduced in the light of his duties to the Company and Mr. Deutsch will then have
no further economic interest in the fees paid to the law firm by the Company for
services rendered subsequent to the Effective Date. See "MANAGEMENT".
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name and Age Positions Held With the Company
- ------------ -------------------------------
Harvey E. Deutsch, age 57 Chairman, President and Chief Executive Officer
and Director
Joel H. Farkas, age 36 Director, Vice President-Finance/ Marketing and
Treasurer (Chief Operating Officer)
and Secretary
Michael A. Messina, age 49 Director and Vice President of Development
Robert A. Lembke, age 42 Director
Norman A. Sheldon, age 54 Director
All director terms expire June 30, 1998.
43
<PAGE>
Harvey E. Deutsch was a founding member of Gateway LLC and has been active
in its business operations since its inception in June 1993. After graduating
from Southern Methodist University, Mr. Deutsch went on to obtain a law degree
from the University of Texas. Additionally, Mr. Deutsch has practiced law for
approximately 30 years in Denver, Colorado and has specialized principally in
real estate law. His practice experience includes significant real estate
property acquisitions, development law, matters relating to financing and
leasing transactions, as well as planning, zoning, land use, water, sewer,
general utility district law, environmental matters and legal matters relating
to municipal and quasi- municipal financing of real property project
infrastructures. Mr. Deutsch is presently a principal of Deutsch, Spillane &
Reutzel, P.C., Denver, Colorado, a firm specializing in real estate, zoning and
land use matters.
Joel H. Farkas was also a founding member of Gateway LLC and has been
active in its business operations since its inception in June, 1993. Mr. Farkas
has been engaged in land acquisition, development and finance in Colorado and
Arizona since December, 1984, first as an employee of Farkas Group, Inc., a
family-owned company from 1984 to 1990 and then individually from 1990 to the
present. Mr. Farkas holds a Bachelor of Science degree from the University of
California, Los Angeles.
Michael A. Messina was also a founding member and has been a member of
Gateway LLC since its inception in June 1993. Mr. Messina is a Manager and
controlling member of PrideMark Home Building Group, LLC and Richland
Development Company, LLC (collectively "Richland Homes"), which he founded in
1987. PrideMark is a Denver Metropolitan area home builder and the largest
purchaser of developed lots from the Company in its operations to date. Richland
Development Company, LLC is engaged in the same property acquisitions and lot
development business and in the same areas as the Company. In addition to this
general management responsibilities for those companies, Mr. Messina's focus and
principal activities have related to land acquisition and residential dwelling
product development. Mr. Messina began his career in 1966 with Perl-Mack
Companies, a contracting firm which constructed commercial and residential
projects in the greater Denver, Colorado area. Over the course of his career,
Mr. Messina has developed and built over 5,000 residential dwellings and several
commercial and multi-family projects.
Robert A. Lembke was engaged in the private practice of law in the Denver,
Colorado area from 1979 to 1997. Since 1997 he has been primarily engaged in the
management of his personal investments in real properties, securities and other
investments. Mr. Lembke's legal practice was concentrated in the areas of
business and real estate transactions and taxation. He received a Bachelor of
Science degree from the University of Colorado in 1975, a Juris Doctor degree
from the University of Denver in 1979 and a Masters of Law degree in taxation
from the University of Denver in 1985. Mr. Lembke has been licensed to practice
law in Colorado since 1979. He has also been licensed as a Certified Public
Accountant in Colorado since 1979 and as a Real Estate Broker since 1987.
Norman A. Sheldon has been the President and owner of Sheldon & Associates
of Denver, Colorado since 1985. That firm is engaged in making and managing
investments in retail and commercial real properties, securities and other
investments. Prior to 1985 Mr. Sheldon had over 15 years experience in the real
estate industry and was primarily involved in the areas of acquisition of real
property for development or investment.
44
<PAGE>
Committees of the Board of Directors
The Board of Directors of the Company established an Audit Committee
constituting of Joel H. Farkas, and Robert A. Lembke and Norman A. Sheldon, the
independent directors. The Audit Committee will make recommendations for
selection of the Company's independent auditors, review the annual audit reports
of the Company and review audit and any non-audit fees paid to the Company's
independent auditors. See "EXPERTS". As indicated in the Prospectus section
captioned "RISK FACTORS", the Company has reserved 375,000 shares of its Common
Stock for possible issuance in connection with a Stock Option Plan which it
anticipates will be adopted subsequent to this offering. Such Plan, if adopted,
will be administered by the Compensation and Stock Committee consisting of Joel
H. Farkas, Robert A. Lembke and Norman A. Sheldon. This committee will also
oversee and make recommendations with respect to the compensation of the
Executive Officers and managerial and staff personnel of the Company. An
Executive Committee consisting of Messrs. Deutsch, Farkas and Messina has been
organized by the Board of Directors to act between meetings of the Board.
Executive Compensation
The compensation paid or accrued to the three directors and executive
officers of the Company by Gateway LLC during the year ended December 31, 1996
and the nine months ended September 30, 1997 is set forth in the table below.
None of this compensation was paid or accrued to the directors for their
services as such. All of this compensation was paid or accrued as annual
compensation and there was no long term compensation paid or accrued to any of
the officers.
<TABLE>
<CAPTION>
Name and Period Salary Payment of Prior Other
Principal Position Years Salaries Compensation
- ------------------ --------------- -------------------- --------------------- ----------------------
Paid Accrued Paid Accrued Paid Accrued
--------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Harvey E. Deutsch Year Ended 1996 $10,000 $110,000 $230,000 -0- $8,000 -0-
President and
Chief Executive 9 Months ended
Officer Sept. 30, 1997 $5,000 $85,000 -0- -0- $43,192 -0-
Joel H. Farkas, Year Ended 1996 -0- $108,000 $216,000 -0- $234,268(1) -0-
Vice-President-
Finance and Chief 9 Months ended
Financial Officer Sept. 30, 1997 -0- $81,000 -0- -0- $195,027(1) -0-
Michael A. Year Ended 1996 -0- $108,000 $26,212 -0- $22,000 -0-
Messina, Vice-
President of 9 Months ended
Development Sept. 30, 1997 -0- $81,000 -0- -0- $36,352 -0-
</TABLE>
(1) Pursuant to a consulting agreement with the Company dated January 15, 1996,
Mr. Farkas receives additional compensation for acquisition and financial
services in the amount of 1% of the loan amounts on financing obtained by him on
behalf of the Company. The Company and Mr. Farkas have agreed to terminate the
consulting agreement on the Effective Date.
The table set forth below reflects the compensation to be paid to Harvey
E. Deutsch in his capacity as President and Chief Executive Officer and to Joel
H. Farkas as Vice President and Chief Operating Officer and Michael A. Messina
as Vice President-Development. Other than Messrs. Deutsch, Messina and Farkas,
no other executive officer of the Company will receive compensation in an amount
of $100,000 or more during the fiscal year ending December 31, 1998. Mr. Deutsch
will devote not less than two-thirds of his time to his duties with the Company.
45
<PAGE>
Summary Compensation Table
--------------------------
Annual
Compensation
Name and Principal Position - Salary
- --------------------------- ------------
Harvey E. Deutsch $120,000
Joel H. Farkas 108,000
Michael A. Messina 108,000
Employment Agreements
The Company, as of the Effective Date, will assume and be bound by
employment agreements which have been entered into by the Company and each of
Messrs. Deutsch, Farkas and Messina. The employment agreements are all on
similar terms, except for salary rates as indicated above, and each provide: (a)
annual salaries at the respective rates specified in the table above; (b) for an
initial term through December 31, 2000; (c) for an automatic extension for an
additional one year term after the initial term unless terminated by either
party; (d) for health and disability insurance coverage at the Company's
expense; (e) for an automobile expense allowance of $750 per month; (f) for key
person insurance at Company expense in the face amount of $1,500,000 payable to
the Company; (g) for payment of an annual premium of $25,000 on additional life
insurance payable to a beneficiary designated by each officer; (h) for payment
of six-months salary in the event the agreement is terminated by the Company for
the disability of the officer; (i) for payment of three years of salary to the
decedent's estate in the event of death during the term of the agreement, or
termination of the agreement without cause (as defined in the agreement) by the
Company; (j) for the employee to devote the time required to carry out his
duties to the Company; (k) the recognition by the Company that each employee has
other business interests which will require portions of the employee's time and
some of which may compete with the Company; (l) for reimbursement of accountable
out-of-pocket expenses incurred in the performance of their duties; and (m) for
incentive compensation as may be determined by the Board of Director's
including, stock options, a retirement plan or bonuses. The determination of any
incentive compensation including bonuses is totally within the discretion of the
Board of Directors.
The employment agreements provide that on the Effective Date (also the
date the Company assumes the agreements), the Company will assume any unpaid
amounts due to the three officers thereunder. As of September 30, 1997, this
unpaid liability aggregated $573,000 which will be paid from proceeds of this
offering. See "USE OF PROCEEDS".
Director Compensation
The independent directors may be entitled to receive director fees for
their attendance at regular and special meetings of the Board of Directors of
the Company or committees thereof. The amount of such fees have not yet been
determined, but are not expected to exceed $750 per meeting attended. They may
also be compensated for any services rendered to the Company outside their
normal duties as directors. All directors will be reimbursed for their cash
expenses, including travel expenses, incurred in the performance of their
services. The directors may also participate in any stock incentive or stock
option programs developed by the Company. The Company will also endeavor to
provide health insurance to the independ ent directors.
46
<PAGE>
Key Personnel
Jeffrey K. Prager, is in charge of all financial reporting for the
Company. Mr. Prager has been a full time employee of the Company since June,
1995. He was a part time employee of the Company from its inception in June,
1994 through May, 1995. From August, 1983 to June, 1995, Mr. Prager operated a
public accounting firm which provided a full range of financial services for
clients engaged in small to medium size businesses. Mr. Prager is a Certified
Public Accountant and has held such designation since 1975. In addition to
providing traditional accounting services, Mr. Prager's firm also provided
economic analysis, real estate analysis, business planning and financing. Mr.
Prager served as corporate Controller for the Alpert Corporation during the
period May, 1978 to November, 1991. During such time, the Alpert Corporation was
one of the largest privately owned home builders in the greater Denver, Colorado
metropolitan area. Mr. Prager graduated with a degree in economics from the
University of Colorado and did post-graduate work in accounting.
Mark R. Traver, is the Director of Development, which includes forward
planning, platting, engineering design, and overseeing field construction which
position he has held since April of 1997. Mr. Traver has been in the land
development industry since 1983, and began as a field superintendent for Talley
Corporation and eventually became Vice President of Land Development before
being transferred to Florida in the same capacity for Good Property Company in
1986. Mr. Traver graduated from Iowa State University with a degree in Landscape
Architecture. From 1992 to 1993 he worked for Richardson, Nagy,
Martin-Architects and Planners in Newport Beach, California as Project Director
for Master Planning and Community Development. From 1994 to 1997 he worked as
Director of Development for Continental Homes.
Geoffrey J. Phillips, is the manager of Gateway American Properties
Brokerage, LLC. (a Colorado limited liability company in which Messrs. Deutsch,
Farkas and Messina each own a 17.5% membership interest). Mr. Phillips has been
the broker for Gateway American Properties Brokerage, LLC since its inception in
September, 1994 and is also employed with Gateway LLC. He as been involved in
the residential/commercial real estate profession for 25 years and has spent ten
years managing his own real estate company. Mr. Phillips graduated with a B.A.
in economics from the University of Wisconsin. Mr. Phillips is responsible for
all the marketing of developed and undeveloped parcels for Gateway LLC. Mr.
Phillips maintains a continuing relationship with the builder communities and
coordinates the completion and delivery of lots to the end purchaser.
Indemnification
Under the Articles of Incorporation of the Company, officers and directors
of the Company, and former officers and directors, are entitled to
indemnification from the Company to the full extent permitted by law. The
Company's bylaws and the Colorado Business Corporation Act generally provide for
such indemnification for claims arising out of the acts or omissions of Company
directors and officers (and certain other persons) in their capacity as such and
undertaken in good faith and in a manner reasonably believed to be in, or not
opposed to, the best interests of the Company, and further specify the circum
stances under which such indemnification shall be available. The Company also
has entered into an Indemnification Agreement with Messrs. Deutsch, Farkas and
Messina pursuant to which the Company has agreed to indemnify these individuals
47
<PAGE>
from and against any liability, cost or expense incurred by them under any loan
or obligation obtained by or for the benefit of the Company, including their
guarantees of the Notes. Insofar as such provisions of the Articles of
Incorporation or Bylaws of the Company, the Colorado Business Corporation Act or
the Indemnification Agreement purport to protect any director or officer of the
Company from liability to the Company and its holders of Common Stock and
arising from the willful misfeasance, bad faith, gross negligence or reckless
disregard of such directors' or officers' duties of office, the Company has been
informed that, in the opinion of the Commission, such indemnification provisions
violate public policy as expressed in the Act and are therefore unenforceable.
Conflicts of Interests and Competition
As discussed in "PROSPECTUS SUMMARY", "RISK FACTORS", "BUSINESS", "CERTAIN
TRANSACTIONS", and "MANAGEMENT", Messrs. Deutsch, Farkas, and Messina, the
officers and three of the directors of the Company, are involved in several
situations which involve possible conflicts of interests between themselves and
the Company. They all have interests in entities which have conveyed and may
convey real property to the Company. For the 33 month period beginning January
1, 1995, 68% of the finished and semi-finished lots sold by the Company have
been sold to PrideMark, a home building company owned by Mr. Messina. It is
anticipated that the Company will continue to sell between one-third and
one-half of its platted, finished and semi-finished lots to PrideMark during the
next year. In addition, PrideMark Homes began direct competition with the
Company in 1992, when it began developing, platting and acquiring lots to serve
its own homebuilding needs.
Robert A. Lembke and Norman A. Sheldon, directors of the Company, have
investments and business interests in the real estate business in the Colorado
area. Mr. Lembke is presently involved in one entity engaged in developing and
selling lots to residential home builders, although it is not in an area which
directly competes with the Company. They hold interests in entities which may
convey real property to the Company.
Mr. Farkas has provided loan acquisition and financial consulting services
to Gateway LLC for which he has received a consulting fee equal to 1% of loans
acquired through his services.
The Company has and intends to continue to obtain legal services from a
law firm in which Mr. Deutsch is a shareholder and principal.
In recognition of the potential conflicts of interest, the Company has;
(a) reached an understanding with Messrs. Deutsch, Farkas and Messina that any
real estate purchased from them will be purchased at 10% below fair market
value, based upon independent expert appraisals and each such purchase must be
approved by the Company's two independent directors; (b) developed a property
marketing program designed to decrease the Company's dependence on PrideMark for
lot sales; (c) reached an agreement with Mr. Farkas to terminate his consulting
agreement on the Effective Date; and (d) reached an understanding with Mr.
Deutsch that he will have no further economic interest in any legal fees paid to
his firm for legal services performed after the Effective Date.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the Effective Date and as adjusted
to reflect: (i) the completion of the Transaction involving the requisition of
Gateway LLC; and (ii) the sale of the Common Stock offered hereby (assuming no
exercise of the Over-Allotment Option) by (a) each stockholder known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (b) each director of the Company, (c) each executive officer of the
Company as identified in this Prospectus, and (d) all executive officers and
directors as a group. Except as otherwise indicated, the Company believes that
the beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such Shares subject to community property laws
where applicable. The business address of each individual listed below is the
same as the address of the Company's principal executive offices in Denver,
Colorado.
<TABLE>
<CAPTION>
Shares Owned Percentage of Percentage of
Beneficial as of the Beneficial Ownership Beneficial Ownership
Effective Date (1) before Offering(1) after Offering(1)
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Harvey E. Deutsch(2) 493,594 20.98% 12.81%
Joel H. Farkas(3) 493,594 20.98% 12.81%
Michael A. Messina 835,312 35.51% 21.68%
Officers & Directors 1,825,500 77.61% 47.39%
as a group (5 persons)
(1)
</TABLE>
- -------------
(1) The 1,822,500 shares owned by Messrs. Deutsch, Farkas and Messina along
with 202,500 shares owned by other members of Gateway LLC are deposited
under a Voting Trust Agreement described below. Under that Agreement, any
two of these three individuals can vote the entire 2,025,000 deposited
shares or 77.47% of the shares outstanding prior to the Offering and
52.57% afterwards.
(2) Of these Shares 330,075 are owned by family members or trusts for the
benefit of family members of Mr. Deutsch. Mr. Deutsch exercises voting
control over such Shares, as well as shared voting control with Messrs.
Farkas and Messina over 202,500 additional Shares owned by other members
of Gateway LLC, by virtue of the Voting Trust Agreement described in note
1 above and below.
(3) Of these Shares 149,344 are owned by a trust for the benefit of family
members of Mr. Farkas. Mr. Farkas exercised voting control over such
Shares, as well as shared voting control with Messrs. Deutsch and Messina
over 202,500 additional Shares owned by other members of Gateway LLC, by
virtue of the Voting Trust Agreement described in Note 1 above and below.
Messrs. Deutsch, Farkas and Messina have entered into a Voting Trust
Agreement pursuant to which, on and after the Effective Date, the shares of
Common Stock of the Company beneficially owned by them and members of their
respective families or family trusts will be voted by them as voting trustees
serving pursuant to such Agreement. Under the terms of the Voting Trust
Agreement, Messrs. Deutsch, Farkas and Messina have shared voting control (in
proportion to the percentage of Shares owned by each of them and their
respective family members and family trusts) over a total of 2,025,000 Shares
which includes 202,500 Shares owned by other members of Gateway LLC. The Voting
Trust Agreement has a term of ten years, and is renewable for an additional ten
year period. During its term, the Voting Trust Agreement can be terminated only
by agreement of the voting trustees. By virtue of its terms, the existence of
such Voting Trust Agreement is not expected to diminish the voting control of
the Company vested in Messrs. Deutsch, Farkas and Messina.
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<PAGE>
Messrs. Deutsch, Farkas and Messina, their family members and the trusts
for the benefit of their family members, as well as the other members of Gateway
LLC, also have entered into a Cross Purchase Agreement providing for the sale
and purchase of the Company's Common Stock among such persons and their
representatives.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Barron Chase Securities,
Inc. (The "Representative") is acting as representative have severally agreed to
purchase from the Company an aggregate of 1,500,000 Shares and 3,000,000
Purchase Warrants (collectively, the "Securities"). The number of Securities
which each Underwriter has agreed to purchase is set forth opposite its name.
Number of Number of
Underwriter Shares Warrants
----------- --------- ---------
Barron Chase Securities, Inc
========= =========
Total 1,500,000 3,000,000
The Securities are offered by the Underwriters subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
approval of certain legal matters by counsel and certain other conditions. The
Underwriters are committed to purchase all Securities offered by the Prospectus,
if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the Securities to the public at the offering price set forth in
the cover page of this Prospectus, and that the Underwriters may allow
concessions to certain selected dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD"), all of whom agree to sell the
Securities in conformity with the NASD's Conduct Rules. Such concessions will
not exceed the amount of the underwriting discount that the Underwriters are to
receive.
The Company has granted to the Representative an Over-Allotment Option,
exercisable for 45 days from the Effective Date, to purchase up to an additional
225,000 Shares and an additional 450,000 Purchase Warrants at the public
offering price less the Underwriting Discount set forth on the cover page of
this Prospectus. The Representative may exercise this option solely to cover
over-allotments in the sale of the Securities being offered by this Prospectus.
Officers and directors of the Company may introduce the Representative to
persons to consider this Offering and to purchase Securities either through the
Representative, other Underwriters or through participating dealers. In this
connection, no shares have been reserved for these purchases and officers and
directors will not receive any commissions or any other compensation.
50
<PAGE>
The Company has agreed to pay to the Representative a commission of 10% of
the gross proceeds of this Offering (the "Underwriting Discount"), including the
gross proceeds from the sale of the over-allotment option, if exercised. In
addition, the Company has agreed to pay to the Representative the
non-accountable expense allowance of 3% of the gross proceeds of this Offering,
including proceeds from any Securities purchased pursuant to the over-allotment
option. The Representative's expenses in excess of the Non-Accountable Expense
Allowance will be paid by the Representative. To the extent that the expenses of
the Representative are less than the amount of the Non-Accountable Expense
Allowance received, such excess shall be deemed to be additional compensation to
the Representative. The Representative has informed the Company that it does not
expect sales to discretionary accounts to exceed 5% of the total number of
Securities offered by the Company hereby.
The Company has agreed pursuant to the terms of a Financial Advisor
Agreement to be entered into at the Closing (the "Financial Advisor Agreement")
to engage the Representative as a financial advisor at a fee of $108,000 all of
which is payable to the Representative at the Closing. Pursuant to the terms of
a financial advisory agreement, the Representative has agreed to provide for a
period of 12 months from the Effective Date of the Registration Statement, at
the Company's request, advice to the Company concerning potential merger and
acquisition and financing proposals, whether by public financing or otherwise.
There are currently no plans, proposals, arrangements or understandings with
respect to any potential merger, acquisition, financial proposal or joint
venture.
Prior to this Offering, there has been no public market for the shares of
Common Stock or Purchase Warrants. Consequently, the initial public offering
price for the Securities, and the terms of the Purchase Warrants (including the
exercise price of the Purchase Warrants), have been determined by negotiations
between the Company and the Representative. Among the factors considered in
determining the public offering price were the history of, and the prospects
for, the Company's business, an assessment of the Company's management, its past
and present operations, the Company's development and the general condition of
the securities market at the time of this Offering. The initial public offering
price does not necessarily bear any relationship to the Company's assets, book
value, earnings or other factors, and no assurance can be given that public
market for the Shares or the Purchase Warrants will develop after the Closing,
or if a public market in fact develops, that such public market will be
sustained, or that the Shares or Purchase Warrants can be resold at any time at
the offering or any other price. See "RISK FACTORS Determination of Share and
Warrant Offering Price".
In order to facilitate the offering of the Common Stock and Purchase
Warrants, the Representative may engage in transactions that stabilize, maintain
or otherwise affect the price of the Common Stock and Purchase Warrants.
Specifically, the Representative may over allot in connection with the Offering,
creating a short position in the Common Stock and Purchase Warrant for its own
account. In addition, to cover over allotments or to stabilize the price of the
common Stock and Purchase Warrant, the Representative may bid for, and purchase,
shares of Common Stock and Purchase Warrants in the open market. Finally, the
Underwriter may reclaim selling concessions allowed to a dealer for distributing
the Common Stock and Purchase Warrants in the Offering, if the Representative
repurchases previously distributed Common Stock or Purchase Warrants in
transactions to cover the Representative's short position in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the Common Stock and/or Purchase Warrants at a level above that
which might otherwise prevail in the open market. The Representative is not
required to engage in these activities, and, if commenced, any such activities
may be discontinued at any time.
51
<PAGE>
At the Closing, the Company will issue to the Representative or persons
related to the Representative, for nominal consideration, the Common Stock
Representative Warrants to purchase up to 150,000 shares of Common Stock and the
Warrant Representative Warrants to purchase up to 300,000 warrants (the
"Underlying Warrants"). The Common Stock Representative Warrants, and the
Warrant Representa tive Warrants are sometimes referred to in this Prospectus as
the "Representative Warrants." The Representative Warrants will be exercisable
for a five-year period commencing on the Effective Date. The exercise price of
each Common Stock Representative Warrant shall be $6.00 per share (150% of the
public offering price). The exercise price of each Warrant Representative
Warrant shall be $.290625 per warrant (155% of the public offering price). Each
Underlying Warrant will be exercisable for a five-year period commencing on the
Effective Date to purchase one share of Common stock at an exercise price of
$6.975 per share of Common Stock. The Representative Warrants will be restricted
from sale, transfer, assignment or hypothecation for a period of 12 months from
the Effective Date by the holder, except (i) to officers or partners of the
Representative, other Underwriters and members of the selling group and/or their
officers or partners; (ii) by will; or (iii) by operation of law.
The Common Stock Representative Warrants and the Warrant Representative
Warrants contain provisions providing to appropriate adjustment in the event of
any merger, consolidation, recapitalization, reclassification, stock dividend,
stock split of similar transaction. The Representative Warrants contain net
issuance provisions permitting the holders thereof to elect to exercise the
Representative Warrants in whole or in part and instruct the Company to withhold
from the securities issuable upon exercise, a number of securities, valued at
the current fair market value on the date of exercise, to pay the exercise
price. Such net exercise provision has the effect of requiring the Company to
issue shares of Common Stock without a corresponding increase in capital. A net
exercise of the Representative Warrants will have the same dilutive effect on
the interests of the Company's stockholders as will a cash exercise. The
Representative Warrants do not entitle the Representative to any rights as a
stockholder of the Company until such Representative Warrants are exercised and
shares of Common Stock are purchased thereunder.
The Representative Warrants and the securities issuable thereunder may not
be offered for sale except in compliance with the applicable provisions of the
Securities Act. The Company has agreed that if it shall cause a post-effective
amendment, a new registration statement, or similar offering document to be
filed with the Commission, the holders shall have the right, for seven years
from the Effective Date, to include in such registration statement or offering
statement the Representative Warrants and the securities issuable upon their
exercise at no expense to the holders. Additionally, the Company has agreed
that, upon request, by the holders of 50% or more of the Representative Warrants
during the period commencing 12 months from the Effective Date and expiring four
years thereafter, the Company will, under certain circumstances, register the
Representative Warrants and any of the securities issuable upon their exercise.
The Company has also agreed that if the Company participates in any
transaction which the Representative has introduced in writing to the Company
during a period of five years after the Closing (including mergers,
acquisitions, joint ventures and any other business transaction for the Company
introduced in writing by the representative), and which is consummated after the
Closing (including an acquisition of assets or stock for which it pays, in whole
or in part, with shares or other securities of the Company), or if the Company
retains the services of the Representative in connection with any such
transaction (an "Introduced Consummated Transaction"), then the Company will pay
for the Representative's services in amount equal to 5% of up to one million
dollars of value paid or received in the transaction, 4% of the next million of
such value, 3% of the next million of such value, 2% of the next million of such
value, and 1% of the next million dollars of such value and of all such value
above $4,000,000.
52
<PAGE>
The Company has agreed to indemnify the Underwriters against any costs or
liabilities incurred by the Underwriters by reasons of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement on Form SB-2 and this Prospectus filed by the Company
with the Commission (the "Registration Statement") under the Securities Act .
The Underwriters have in turn agreed to indemnify the Company against any costs
or liabilities by reason of misstatements or omissions to state material facts
in connection with the statements made in the Registration Statement and this
Prospectus, based on information relating to the Underwriters and furnished in
writing by the Underwriters. To the extent that this section may purport to
provide exculpation from possible liabilities arising from the federal
securities laws, in the opinion of the Commission, such indemnification is
contrary to public policy and therefore unenforceable.
The underwriting agreement provides that the Company will, for a period of
three years from the Effective Date of the Registration Statement, maintain a
Board of Directors of not less than five members, two of which are independent.
It also provides that the Representative shall have the opportunity to have an
observer attend meetings of the Company's Board of Directors at the Company's
expense.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement. See "ADDITIONAL INFORMATION."
53
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.01 par value. As of December 1, 1997 the Company had
outstanding 327,000 shares of Common Stock held by 39 holders of record. Upon
consummation of this offering, there will be 3,852,000 shares of Common Stock
outstanding and if the Over-Allotment Option is utilized to its full extent,
there will be 4,077,000 shares of Common Stock outstanding.
Common Stock
Holders of shares of the Common Stock are entitled to one vote per Share
on all matters to be voted upon by the stockholders. Cumulative voting is not
permitted in the election of directors. In summary, cumulative voting permits
the holders of voting securities to cumulate the vote attributable to such
securities by multiplying the number of Shares held times the number of
candidates standing for election to a corporation's board of directors and then
allocating the resulting number of votes among one or more of such candidates.
The absence of cumulative voting and the number of Shares beneficially owned by
the present directors and officers of the Company will vest voting control of
the Company in such persons. See "PRINCIPAL SHAREHOLDERS". The holders of shares
of Common Stock are entitled to receive ratably such dividends, if any, as may
be declared from time to time by the Board of Directors out of funds legally
available therefor. See "DIVIDEND POLICY".
In the event of liquidation, dissolution, or winding up of the Company,
the holders of shares of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. Shares of Common Stock have no
preemptive, conversion or other subscription rights and there are no redemption
or sinking fund provisions applicable to the Common Stock. All of the shares of
Common Stock sold in this offering will be fully paid and non-assessable.
Warrants
General. The Warrants offered hereby will be issued in registered form
pursuant to the terms of a warrant agreement (the "Warrant Agreement"), dated as
of the Effective Date, between the Company and American Securities Transfer &
Trust, Inc., as warrant agent (the "Warrant Agent"). An aggregate of 3,000,000
Warrants (up to 3,450,000 Warrants if the Over-Allotment option is exercised in
full) will be issued pursuant to the Warrant Agreement.
The following statements and summaries of certain provisions of the
Warrant Agreement are subject to the more detailed provisions of the Warrant
Agreement, copies of which may be examined at the principal offices of the
Warrant Agent and a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
Right to Purchase Shares of Common Stock. Each Warrant will entitle the
registered holder to purchase from the Company one share of Common Stock at an
exercise price of $4.50 per Share during the period commencing on the date of
this Prospectus and ending on the fifth anniversary of such date.
Exercise. Each holder of a Warrant may exercise such Warrant by
surrendering the certificate evidencing such Warrant, with the form of election
to purchase on the reverse side of such certificate properly completed and
executed, together with payment of the exercise price, to the Warrant Agent. No
Warrants may be exercised unless at the time of exercise there is a current
54
<PAGE>
prospectus covering the shares of Common Stock issuable upon the exercise of
such Warrants under an effective registration statement. The Company is required
to maintain an effective registration statement, including such current
prospectus, so long as any of the exercisable Warrants remain outstanding. While
it is the Company's intention to comply with this obligation, there can be no
assurance that it will be able to do so. See "RISK FACTORS".
The exercise price will be payable in cash or by certified or official
bank check payable to the Company. If fewer than all of the Warrants evidenced
by a warrant certificate are exercised, a new certificate will be issued for the
remaining number of Warrants. Certificates evidencing the Warrants may be
exchanged for new certificates of different denominations by presenting the
Warrant certificate at the office upon exercise of any Warrants and the number
of Warrants are subject to adjustment upon the occurrence of certain events,
including stock dividends, reclassifications, reorganizations, consolidations,
merger, and certain issuances and redemptions of Common Stock and securities
convertible into or exchangeable for Common Stock. No adjustment in the exercise
price will be required to be made with respect to the Warrants until cumulative
adjustments amount to $.05. In the event of any capital reorganization, certain
reclassification of the Common Stock, any consolidation or merger involving the
Company (other than a consolidation or merger which does not result in any
reclassification or change in the outstanding shares of Common Stock), or sale
of the properties and assets of the Company, as, or substantially as, an
entirety to any other corporations, Warrants will thereupon become exercisable
only for the number of shares of stock or other securities, assets, or cash to
which a holder of the number of shares of Common Stock of the Company
purchasable (at the time of such reorganization, reclassification,
consolidation, merger or sale) upon exercise of such Warrants would have ben
entitled upon such reorganization, reclassification, consolidation, merger or
sale.
Other Rights. In the event of an adjustment in the number of shares of
Common Stock issuable upon exercise of the Warrants, the Company will not be
required to issue fractional shares of Common Stock upon exercise of the
Warrants. In lieu of fractional shares of Common Stock, there will be paid to
the holder of the Warrants at the time of such exercise an amount in cash equal
to the same fraction of the current market value of a share of Common Stock of
the Company.
Warrant holders do not have voting or any other rights of shareholders of
the Company and are not entitles to dividends, if any.
Redemption of Warrants. If the closing price of the Common Stock shall
have equaled or exceeded $6.40 per Share for a period of 30 consecutive trading
days at any time after the date of this Prospectus, the Company may redeem the
Warrants by paying holders $.35 per Warrant, provided that notice of such
redemption is mailed within ten days after the end of such period and prescribes
a redemp tion date at least 30 days thereafter. Warrant holders will be entitled
to exercise Warrants at any time up to the business day next preceding the
redemption date.
Modification of the Warrant Agreement. The Warrant Agreement contains
provisions permitting the Company and the Warrant Agent, without the consent of
the Warrant holders, to supplement or amend the Warrant Agreement in order to
cure any ambiguity or defect, or to make any other provision in regard to
matters or questions arising thereunder that the Company and the Warrant Agent
may deem necessary or desirable and that does not adversely affect the interests
of the Warrant holders.
55
<PAGE>
Transfer Agent and Registrar and Warrant Agent
The Transfer Agent and Registrar and Warrant Agent for the Common Stock is
American Securities Transfer & Trust, Inc., Denver, Colorado.
Shares Eligible for Future Sale
Prior to this offering, there has been no public market for the Common
Stock or the Warrants. Sales of substantial amounts of shares of Common Stock in
the public market could adversely affect market prices of the Shares and make it
more difficult for the Company to sell equity securities in the future at a time
and price it deems appropriate. See "RISK FACTORS".
Upon completion of the offering, there will be 3,852,000 shares of Common
Stock outstanding excluding an aggregate of 4,125,000 shares issuable upon
exercise of; (i) the Warrants (3,000,000 Shares); (ii) the Over-Allotment Option
and the Warrants issuable thereunder (675,000 shares); (iii) the Founders'
Warrants (300,000 shares); (iv) the Representative's Warrants (450,000 shares);
and (v) shares possibly issuable under the Stock Option Plan which may be
adopted by the Company (a maximum of 375,000 Shares). Of these shares, the
1,500,000 shares sold in this offering, the 3,000,000 shares underlying the
Warrants, and the maximum of 675,000 shares issuable upon full exercise of the
Over-Allotment Option and the exercise of the Warrants issuable thereunder, will
be freely tradeable without restriction or further registration under the Act,
except for any such shares purchased by an "affiliate" of the Company, which
will be subject to the resale limitations of Rule 144 under the Act. As defined
in Rule 144, an affiliate of the issuer is a person who, directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, such issuer, and generally includes members of the Board of
Directors and senior management. Additionally, the 300,000 shares underlying the
Founders' Warrants and the 327,000 shares of the Company's Common Stock issued
prior to the Transaction, will also be registered under the Act. Of such 327,000
shares of Common Stock, 27,000 shares may not be sold for a period of 90 days
from the Effective Date. The remaining 300,000 outstanding shares and the
300,000 Shares issuable upon full exercise of the Founders' Warrants, while
registered under the Act, are subject to "lockup provisions" existing between
the holders thereof and the Representative which preclude their sale into the
market without the Representatives prior consent for 15 months from the
Effective Date.
Of the 2,352,000 shares of Common Stock outstanding on the Effective Date,
the 2,025,000 Shares issued in the Transaction for the membership interests in
Gateway LLC, the 450,000 Shares issuable upon full exercise of the
Representative's Warrants, and the maximum of 375,000 Shares possibly issuable
upon any Stock Option Plan adopted by the Company are or will be "Restricted
Securities" as defined in Rule 144 under the Act ("Rule 144") (collectively the
"Restricted shares") and may not be sold without registration under the Act
unless pursuant to an applicable exemption therefrom. The 2,025,000 shares
issued in the Transaction are also subject to the "lock-up provisions" for the
15 months from the Effective Date. The Company has granted certain registration
rights with respect to the shares of Common stock underlying the
Representative's Warrants. In addition, the Company expects to register under
the Act at any appropriate time, the Shares reserved for issuance under any
Stock Option Plan adopted.
In general, Rule 144 allows a stockholder who has beneficially owned
Restricted Shares for at least one year to sell a number of Restricted Shares
within any three-month period that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock (approximately 38,520
Shares after giving effect to this offering) or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks immediately preceding
such sale. Sales under Rule 144 are also subject to certain requirements as to
the manner and notice of sale and the availability of public information about
the Company. A stockholder who is not an "affiliate" of the Company at any time
during the 90 days immediately preceding a sale, and who has beneficially owned
his Shares for at least two years (as computed under Rule 144) is entitled to
sell such Shares under Rule 144 without regard to the volume and manner of sale
limitations described above.
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<PAGE>
SELLING STOCKHOLDERS
The Registration Statement of which this Prospectus forms a part includes
627,000 shares of Common Stock (the "Selling Stockholder Shares") for resale by
certain stockholders of the Company (the "Selling Stockholders"). Of the Selling
Stockholders Shares, 327,000 are outstanding shares of Common Stock and 300,000
are shares of Common Stock underlying the Founders Warrants. Under certain
"lockup provisions" between the Representative and the Selling Stockholders, the
300,000 outstanding shares and the 300,000 shares underlying the Founders
Warrants may not be sold without the Representatives consent for 15 months from
the Effective Date. The remaining 27,000 Selling Stockholders Shares may not be
sold for 90 days from the Effective Date. See "DESCRIPTION OF SECURITIES -
Shares Eligible for Future Sale". Subject to these restrictions, the Selling
Stockholders may from time to time sell or otherwise dispose of such shares of
common Stock on their own behalf at market prices then prevailing or otherwise
at prices then available. None of these shares are being sold in the offering
which is being underwritten by the Underwriters, and the Company will not
receive any of the proceeds from the sale of these Selling Stockholders' Shares.
The Company is paying all of the expenses of registration of the Selling
Stockholders' Shares. Brokers' commissions, taxes and other selling expenses are
to be borne by the Selling Stockholders and are not expected to exceed normal
selling expenses. Sales of the Selling Stockholders' Shares will be subject to
the prospectus delivery requirements and other requirements of the Securities
Act.
There are no current or future plans, proposals, arrangements or
understandings of the Representa tive or known to the Representative with
respect to modifying, shortening or waiving any of the described "lock-up
provisions".
LEGAL MATTERS
Certain legal matters in connection with the Common Stock and Warrants
offered hereby are being passed upon for the Company by William T. Kirtley,
P.A., Sarasota, Florida and Gilbert L. McSwain, Esq., Denver, Colorado. Certain
legal matters will be passed upon for the Underwriters by David A.
Carter, P.A., Boca Raton, Florida,
EXPERTS
The consolidated financial statements of Gateway LLC as of December 31,
1996, and for each of the years in the two-year period ended December 31, 1996,
and the balance sheet of Gateway American Properties Corporation (a Colorado
Corporation), included in this Registration Statement have been audited by
Gelfond Hochstadt Pangburn & Co., independent certified public accountants,
Denver, Colorado, as stated in their reports appearing herein, and are included
in reliance upon the reports of such firm, given upon their authority as experts
in accounting and auditing.
The financial statements of Gateway American Properties Corporation (a
Florida Corporation) as of December 31, 1995 and 1996, and for the period from
January 12, 1995 (date of inception) to December 31, 1995, and for the year
ended December 31, 1996, included in this Registration Statement have been
audited by Beatty & Company, P.A., independent certified public accountants,
Sarasota, Florida, as stated in their report appearing herein, and are included
in reliance upon the report of such firm, given upon their authority as experts
in accounting and auditing.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933 with respect to the Securities, among other
securities. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the Rules and Regulations of the Commission. For further information with
respect to the Company and this Offering, reference is made to the Registration
Statement, including the exhibits filed therewith, which may be examined at the
Commission's principal office, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549; the Northeast Regional Office of the Commission at
7 World Trade Center, Suite 1300, New York, New York 10048; and the Midwest
Regional Office of the Commission, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, where copies may be obtained upon payment
of the fees prescribed by the Commission, Such documents may also be obtained
through the website maintained by the Commission at http://www.sec.gov.
Descriptions contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are not
necessarily complete and each such description is qualified by reference to such
contract or document. The Company will provide without charge to each person who
receives a Prospectus, upon written or oral request of such person to the
Company at the following address or telephone number, a copy of any of the
information that is incorporated by reference in this Prospectus: 9145 East
Kenyon Avenue, Suite 200, Denver, Colorado 80237, Attention: Joel H. Farkas,
telephone (303)843-9742.
58
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION,
a Colorado Corporation
INDEX TO FINANCIAL STATEMENTS
GATEWAY AMERICAN PROPERTIES, LLC,
Page
Independent Auditors' Report..........................................F-3
Consolidated Balance Sheets...........................................F-4
Consolidated Statements of Income.....................................F-5
Consolidated Statements of Members' Equity............................F-6
Consolidated Statements of Cash Flows.................................F-7
Notes to Consolidated Financial Statements............................F-9
GATEWAY AMERICAN PROPERTIES CORPORATION,
(a Colorado Corporation)
Independent Auditors' Report.........................................F-24
Balance Sheet........................................................F-25
Note to Balance Sheet................................................F-26
GATEWAY AMERICAN PROPERTIES CORPORATION,
(a Florida Corporation)
Report of Independent Certified Public Accountant....................F-28
Balance Sheet........................................................F-30
Statement of Operations..............................................F-31
Statement of Shareholder's Equity....................................F-32
Statement of Cash Flows..............................................F-33
Notes to Financial Statements........................................F-34
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
GATEWAY AMERICAN PROPERTIES CORPORATION (Colorado)
GATEWAY AMERICAN PROPERTIES, LLC and
GATEWAY AMERICAN PROPERTIES CORPORATION (Florida)
Introduction...................................................F-38
Pro forma Condensed Balance Sheet..............................F-39
Pro forma Condensed Statements of Operations...................F-40
Notes to Pro forma Condensed Financial Statements..............F-42
F-1
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Gateway American Properties, LLC
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Gateway American
Properties, LLC and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, members' equity and cash flows for each of
the years in the two year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gateway American
Properties, LLC and subsidiaries as of December 31, 1996, the results of their
operations, and their cash flows for each of the years in the two year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
September 22, 1997
F-3
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
1996 1997
----------- ------------
(Unaudited)
Cash $ 133,523 $ 19,290
Restricted cash 534,729
Accounts receivable 69,709 58,750
Accounts receivable, related party 84,650 570,527
Deposits 62,700 72,500
Land under development 16,081,225 21,543,952
Due from metro and
general improvement districts (Note 2):
Related parties 1,415,593 1,432,060
Other 161,038 161,638
Loan fees, net of amortization of $520,408 and
$657,366 in 1996 and 1997, respectively 364,420 227,462
Deferred offering costs 80,595
Other assets 28,819 34,279
----------- -----------
Total assets $18,936,406 $24,201,053
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Accounts payable $ 860,650 $ 923,633
Accounts payable, related parties (Note 5) 1,011,754 802,516
Property taxes payable 77,563 58,200
Customer deposits (Note 4) 236,000 338,500
Notes payable (Note 3):
Private placements 5,500,000 4,000,000
Banks 4,858,817 12,225,169
Related parties 1,047,433 2,500,219
Other 4,782,945 2,395,269
----------- -----------
Total notes payable 16,189,195 21,120,657
----------- -----------
Total liabilities 18,375,162 23,243,506
----------- -----------
Commitments and contingencies (Notes 2, 4, 5, and 6)
Minority interest 156,946 111,403
Members' equity 404,298 846,144
----------- -----------
Total liabilities and members' equity $18,936,406 $24,201,053
=========== ===========
See notes to consolidated financial statements.
F-4
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF INCOME
Year ended Nine months ended
December 31, September 30,
1995 1996 1996 1997
---------------------------------------------------
(Unaudited) (Unaudited)
Sales:
Related party (Note 5) $2,800,535 $ 7,901,928 $4,531,383 $4,485,601
Other 1,574,824 2,598,678 2,304,962 2,260,944
---------- ---------- ---------- ---------
4,375,359 10,500,606 6,836,345 6,746,545
Cost of sales (Note 5) 3,747,285 9,549,080 6,077,747 5,353,431
---------- ---------- ---------- ---------
628,074 951,526 758,598 1,393,114
General and
administrative expenses 589,905 791,522 534,402 791,076
---------- ---------- ---------- ---------
Operating income 38,169 160,004 224,196 602,038
Interest income (expense) 10,728 1,450 (33,480) (3,357)
---------- ---------- ---------- ---------
Income before
minority interest 48,897 161,454 190,716 598,681
Minority interest in
income of
consolidated
joint ventures 39,149 52,010 19,299 75,335
---------- ---------- ---------- ---------
Net income $ 9,748 $ 109,444 $ 171,417 $ 523,346
========== ========== ========== =========
See notes to consolidated financial statements.
F-5
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
Total
Member Member Accumulated members'
contributions distributions earnings equity
------------- ------------- ----------- --------
Balance, January 1, 1995 $296,074 $(113,792) $67,158 $249,440
Contributions from members 30,500 30,500
Net income 9,748 9,748
------- -------- ------- -------
Balance, December 31, 1995 326,574 (113,792) 76,906 289,688
Contributions from members 5,166 5,166
Net income 109,444 109,444
------- -------- ------- -------
Balance, December 31, 1996 331,740 (113,792) 186,350 404,298
Distributions to members
(unaudited) (81,500) (81,500)
Net income for the nine
months ended September 30,
1997 (unaudited) 523,346 523,346
------- -------- ------- -------
Balance, September 30,
1997 (unaudited) $331,740 $(195,292) $709,696 $846,144
======= ======== ======= =======
See notes to consolidated financial statements.
F-6
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended Nine months ended
December 31, September 30,
1995 1996 1996 1997
------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,748 $109,444 $ 171,417 $523,346
---------- ---------- ---------- ----------
Adjustments to reconcile
net income to net cash
used in operating activities:
Depreciation 4,551 6,496 4,872 3,836
Amortization 232,618 266,909 196,649 127,662
Minority interest in income
of consolidated joint ventures 39,149 52,010 19,299 75,335
Changes in operating assets
and liabilities:
Restricted cash 1,979,079 (181,304) 203,879 534,729
Accounts receivable (258,123) 125,941 (49,487) (474,918)
Deposits (62,700) (50,000) (9,800)
Land under development (6,341,433) (3,896,108) (2,982,980) (5,462,727)
Due from metro and general
improvement districts (503,806) (1,072,825) (766,615) (17,067)
Loan fees (210,354) (370,491) (357,379)
Other assets (27,693) 108,339 108,039
Accounts payable 866,859 611,820 (468,028) (146,255)
Property taxes payable 81,873 (27,437) (71,347) (19,363)
Customer deposits 86,313 (73,333) (49,999) 102,500
---------- ---------- ---------- ----------
Net cash flows used
in operating activities (4,041,219) (4,403,239) (4,091,680) (4,762,722)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Distributions to minority
interest (12,040) (59,667) (34,667) (120,878)
---------- ---------- ---------- ----------
Net cash flows
used in investing activities (12,040) (59,667) (34,667) (120,878)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Deferred offering costs (80,595)
Issuance of notes payable 6,599,343 19,456,461 17,121,666 12,804,180
Payments of notes payable (2,781,389) (14,867,850)(12,759,026) (7,872,718)
Contributions from members 30,500 5,166 175
Distributions to members (81,500)
---------- ---------- ---------- ----------
Net cash flows provided
by financing activities 3,848,454 4,593,777 4,362,815 4,769,367
---------- ---------- ---------- ----------
Net increase (decrease) in cash (204,805) 130,871 236,468 (114,233)
Cash beginning 207,457 2,652 2,652 133,523
---------- ---------- ---------- ----------
Cash ending $ 2,652 $133,523 $ 239,120 $19,290
========== ========== ========== ==========
</TABLE>
(Continued)
F-7
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years ended Nine months ended
December 31, September 30,
1995 1996 1996 1997
-----------------------------------------------
(Unaudited)(Unaudited)
<S> <C> <C> <C> <C>
Supplemental disclosure of
cash flows information:
Cash paid during the
period for interest $ 1,062,285 $ 2,261,129 $ 1,753,000 $ 1,665,000
========== ========== ========== ==========
Disclosure of noncash
financing activities:
During 1996, the Company
assumed indebtedness of
members totaling $433,212
related to development costs
they had incurred which has
been included as costs of
land under development (Note 5).
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies:
a. Capitalization and organization of the limited liability company:
Gateway American Properties LLC (Gateway LLC or the Company) was formed in
June 1994 for the purpose of acquiring, zoning, platting, and developing
real property for residential use, into lots available for sale to
homebuilders. In certain subdivisions, the Company also constructs homes
or other buildings on properties it has developed instead of selling the
improved lots to other homebuilders. Land under development is
concentrated in the greater Denver metropolitan area and in Fort Collins,
Colorado. The builders may construct single family detached homes or
multifamily attached town homes. The Company also plans to purchase other
real estate; complete the annexation, zoning, platting and infrastructure;
and sell the properties in bulk as platted, or as separate finished lots.
The Company may also engage in the development of commercial properties.
As more fully described in the accompanying notes, a substantial portion of
the land acquisition and sales transactions is with related parties.
Effective December 1994, the Company acquired a 50% ownership in the Land
Investors Acquisition Fund (LIAF), a Colorado limited liability company
formed in March 1994. The 50% membership interest in LIAF was acquired
from the Company's three principal members, one of whom is also a 93%
owner of Richland Development Company, LLC (RDC) and PrideMark, a
significant customer of the Company. The Company paid an amount equal to
50% of the net historical book value of LIAF. Since the Company's
principal members have exercised significant control over LIAF, the
accounts of LIAF have been consolidated with accounts of the Company since
the inception of LIAF.
Effective May 31, 1995, the Company acquired the remaining 50% interest in
LIAF for $235,000, consisting of cash and notes payable, from unrelated
third parties. The acquisition has been accounted for as a purchase and
the assets and liabilities have been recorded at fair value which
approximated historical costs.
F-9
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
a. Capitalization and organization of the limited liability company
(continued):
During 1995, the Company formed Rampart Townhomes at Roxborough, LLC in
which the Company retained a 61.66% interest. In addition, during 1995 the
Company formed Townhomes at Quail Run, LLC in which the Company retained
a 75% interest. Both LLC's have been consolidated in the accompanying
financial statements and the results of their operations have been
included in the financial statements since acquisition. Both entities are
in the business of developing land for sale to homebuilders.
Effective July 31, 1996, the Company acquired a 100% interest in Sterling
Hills, Ltd. for $645,869 of which $354,546 was paid to related parties,
$63,782 was paid to a party related to the underwriter of the Company's
private placements and the remaining amount was paid to unrelated third
parties. Sterling Hills, Ltd. was merged into Gateway American Properties,
LLC as of July 31, 1996. The results of its operations have been included
in the financial statements since acquisition.
During 1996, the Company formed a new subsidiary, Willow Run Properties,
LLC, in which the Company owns 99.999%, with the remaining .001% owned by
a member of the Company.
All significant intercompany accounts and transactions have been
eliminated.
b. Limited Liability Company (LLC):
An LLC is an unincorporated association of one or more persons whose
members have limited personal liability for the obligations or debts of
the entity. For federal income tax purposes, the Company is classified as
a partnership.
F-10
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
c. Revenue and cost recognition:
Revenue and profit are recognized at the time a sale is closed, ownership
is transferred to the buyer, and the Company is not obligated to perform
significant activities subsequent to the closing date. Capitalized costs
are charged to cost of sales upon closing. Consideration received by the
Company for sales is generally cash.
During development, all direct material and labor costs and those indirect
costs related to acquisition and development are capitalized. Costs
incurred in connection with completed lots are expensed as incurred.
Provisions for estimated losses on uncompleted development projects are
recorded in the period in which such losses are determined. All customer
deposits are recorded as liabilities until the sale is completed.
d. Cash equivalents:
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less when purchased to be cash equivalents.
e. Restricted cash:
Restricted cash represents funds held in escrow accounts with a bank for
certain designated purposes in connection with the Company's issuance of
12% secured promissory notes with a balance of $5,500,000 at December 31,
1996 ($4,000,000 at September 30, 1997 (unaudited)) (see Note 3). These
escrow accounts include funds designated for acquisition of the
properties, development of the lots, and payment of interest on the note.
Additionally, all proceeds from sales of finished lots are deposited in
the escrow account to be used for development of additional lots unless
and until funds held in the escrow account are considered sufficient to
cover development costs for all lots pledged as collateral on the note. At
September 30, 1997, all restricted cash had been disbursed in accordance
with the terms of the promissory notes (unaudited).
F-11
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
f. Due from metro and general improvement districts:
Amounts due from metro and general improvement districts consist of costs
incurred by the Company on behalf of certain districts in order to begin
the construction of necessary infrastructure items while the districts are
being established and the houses in the corresponding areas are being
sold. Although the Company has not incurred any losses from the districts,
the collectibility of such advances is dependent on the related
districts' ability to successfully raise sufficient funds in order to
complete the construction of the infrastructure and reimburse the costs of
the Company which may take up to nine years. Management anticipates that
all advances will be collected from the metro general improvement
districts: however, any advances determined to be uncollectible will be
charged to operations.
As of December 31, 1996 and September 30, 1997 (unaudited), included in due
from metro and general improvement districts on the accompanying balance
sheets are $1,415,593 and $1,432,060, respectively, from metro districts
of which three members of the Company comprise the board of directors (see
Note 2).
g. Land under development:
Land under development represents inventory consisting principally of lots
which the Company is zoning, platting, and readying for housing
construction. Inventories are stated at the lower of cost or net
realizable value. On a quarterly and annual basis, the Company assesses
costs allocated to each parcel of land to evaluate net realizable values.
Costs of inventory include all land acquisition costs, studies, site
development, surveys, direct costs of land development, and indirect
costs including financing and other carrying costs incurred
during the period of development. Development costs are allocated to
specific parcels of land.
The Company is developing several projects which it is selling pursuant to
specific performance contracts and option contracts with related and
unrelated parties. Most contracts provide for price escalations based on
the date of closing. These projects are in various stages of development
and will require additional costs before the projects will be completed
and be available for sale. The Company seeks to maintain purchase option
contracts for real estate properties covering a four to seven year supply
of lots, based upon current lot absorption information. In certain
instances, management believes it may take up to nine years to totally
complete development of certain major projects. At September 30, 1997
(unaudited) platted lots totaled approximately $10,475,000 and lots under
development totaled approximately $11,069,000.
F-12
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
h. Capitalization of interest:
The Company capitalizes interest on land under development during the
period of development and includes such costs as cost of sales when the
related real estate is sold. During the years ended December 31, 1995 and
1996, the Company incurred and capitalized interest of $1,062,285 and
$2,261,129, respectively, of which $3,320 and $63,540 was incurred to
related parties.
During the nine month periods ended September 30, 1996 and 1997, the
Company incurred and capitalized interest of approximately $1,753,000 and
$1,665,000, respectively, of which $47,637 and $103,884 was incurred to
related parties (unaudited). At September 30, 1997 land under development
included net capitalized interest of $1,386,154 (unaudited).
i. Loan fees:
Loan fees relating to the private placement notes payable are capitalized
and amortized over the life of the respective loans.
j. Income taxes:
No provision for income taxes has been provided since the members report
their distributive shares of income and deductions of the limited
liability company in their personal capacities, pursuant to election under
Subchapter K of the Internal Revenue Code.
k. Fair value of financial instruments:
The Company's financial instruments consist of cash, accounts receivable,
due from general improvement districts, accounts payable and notes
payable. The carrying value of cash and accounts receivable approximates
fair value due to their short-term nature. Amounts due to non-related
parties, including accounts payable and notes payable approximate fair
value due to their short-term nature and recently negotiated interest
rates, many of which are floating rates.
Notes payable related parties as shown in Note 3, are interest bearing and
due at various dates through September 30, 1999.
Amounts due from general improvement districts are recorded at the amounts
receivable at the balance sheet date; however, the amounts will be paid to
the Company as development infrastructure is completed and billed to
homeowners, which may be over a period of years. As discussed in Note 2,
a portion of these receivables bear interest at 8% payable semi-annually
and the balance of the receivables are non interest bearing. Due to the
indefinite timetable for repayment of these receivables it is not
practicable to estimate their fair value.
Other receivables from and payables to related parties are recorded at the
amounts due at the balance sheet date, and arise from related party
transactions discussed in Note 5. These receivables and payables are all
non interest bearing and are due on demand. However, fair value of these
amounts is not practicable to estimate because the underlying transactions
were not carried out on an arm's-length basis.
F-13
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
l. 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
m. Reclassifications:
Certain amounts reported in the 1995 financial statements have been
reclassified to conform to classifications in the 1996 financial
statements.
n. Interim financial statements (unaudited):
The financial statements as of September 30, 1997, and for the nine months
ended September 30, 1996 and 1997, are unaudited. However, in the opinion
of the Company's management, the interim financial statements contain all
adjustments, including normal recurring adjustments, necessary for a fair
presentation of the Company's financial position, results of operations,
and cash flows.
2. Due from metro and general improvement districts:
Included in "Due from metro and general improvement districts" are limited
tax bonds which the Company received in 1995 from a metro district as
payment for costs incurred by the Company on behalf of the metro district
for the construction of certain infrastructure items. The bonds bear
interest at 8% which is payable on a semiannual basis. The bonds will
mature at a rate of $5,000 per year beginning December 1, 1996, with the
remaining amount of $320,330 due on December 1, 2005. As of December 31,
1996 and September 30, 1997 (unaudited), the Company had $337,768 recorded
in due from metro and general improvement districts on the accompanying
balance sheets related to this metro district.
F-14
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
3. Notes payable:
The Company has notes payable as follows:
December 31, September 30,
1996 1997
----------- ------------
(Unaudited)
Notes payable, private placement, due
September 30, 1999, payments in eight
equal installments of $500,000 beginning
December 31, 1997, and each three months
thereafter, interest at 12% payable
monthly, collateralized by deed of trust
on various parcels of real property
and guaranteed by certain members of
the Company $ 4,000,000 $ 4,000,000
Notes payable, private placement, due
April 30, 1997, payments in two equal
installments of $1,500,000 on April 30,
1996 and 1997, interest at 12% payable
monthly, collateralized by deed of trust
on various parcels of real property and
guaranteed by certain members of the
Company 1,500,000
Notes payable, bank, due from February 5,
1998 through March 1, 1999, interest
at 1% to 2% above prime rate with either
quarterly payments or due at maturity,
collateralized by deeds of trust on
various parcels of real property 1,724,037 9,656,830
F-15
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
3. Notes payable (continued):
December 31, September 30,
1996 1997
----------- ------------
(Unaudited)
Notes payable, bank, due from January 1,
1998 through June 30, 1998, interest
at 1.5% above prime, payable monthly,
collateralized by deeds of trust on
various parcels of real property 2,156,476 2,478,339
Notes payable, bank, under a line of
credit, due March 19, 1998, interest
at 1.5% above prime, collateralized
by deeds of trust on various parcels
of real property 78,500 90,000
Notes payable, bank, due from March 29,
1997 through June 1, 1997, interest at
12% (or 4% over bank rate, whichever
is greater), payable monthly,
collateralized by various parcels
of real property and guaranteed by
certain members of the Company 899,804
Notes payable, related parties, due
from June 15, 1998 through September 30,
1999, interest at 6% to 10% payable
monthly or quarterly, uncollateralized 897,433 683,930
Note payable, related party, due from
January 1, 1998 through January 1, 1999,
interest at .75% above prime payable
monthly, collateralized by deed of trust
on various parcels of real property 150,000 1,816,289
F-16
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
3. Notes payable (continued):
December 31, September 30,
1996 1997
----------- ------------
(Unaudited)
Notes payable, other, due November 1,
1997 through March 9, 2004, interest
at 8% to 15%, payable monthly or
quarterly, collateralized by deeds
of trust on various parcels of real
property 2,864,449 2,184,574
Notes payable, other, due through
June 15, 1998, interest at 8.5% to 15%,
payable quarterly or deferred until
maturity, uncollateralized 1,918,496 210,695
---------- -----------
$16,189,195 $21,120,657
=========== ===========
Notes payable, private placements provide financing for land acquisition
and development projects. The terms of the private placements require the
Company to maintain certain loan to collateral value ratios and cash
reserves (see Note 1). Notes payable, related parties, are payable to
members, their related companies, and affiliates.
Aggregate maturities for notes payable outstanding at September 30, 1997
(unaudited) are as follows:
1997 $ 2,752,310
1998 13,239,296
1999 3,389,539
2000 0
2001 0
Thereafter 1,739,512
------------
Total notes payable $ 21,120,657
============
F-17
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
4. Option contracts:
The Company has entered into option contracts with unrelated entities to
sell properties which it is developing into lots available for sale to
homebuilders. At December 31, 1996, the Company has committed to sell 119
remaining lots to these parties upon completion of development activity
for a total sales price of $2,971,250 (451 lots at a total sales price of
$11,682,800 at September 30, 1997 (unaudited)). These option contracts
generally include escalation clauses at various rates. Based on costs
incurred through December 31, 1996 (and September 30, 1997 (unaudited)),
and management's estimate of costs to complete the development, the
Company does not anticipate incurring any losses resulting from these
option contracts. Sales to one of these entities in 1996 comprised
approximately 16% of total sales.
At December 31, 1996, the Company has received $236,000 ($338,500 at
September 30, 1997, (unaudited)) as option deposits to be applied against
the lots available for sale.
In June 1997, the Company received $100,000 under an installment land
contract to sell a 10% undivided interest in a land parcel. Under the
agreement, the Company may be required to repurchase the parcel at its
fair market value over the next four years, with agreed upon minimum
appreciation. Consequently, the amount received is recorded as a liability
and the minimum appreciation (or increase in fair market value, if
greater) will accrete over four years (unaudited).
5. Related party transactions:
a. Related party land purchases:
During 1996, the Company and its subsidiaries purchased unimproved land at
a cost of approximately $1,995,000 from affiliated entities. Upon
purchase, the cost of the land is included in land under development.
During 1995, the Company purchased unimproved land from affiliates with a
cost of approximately $2,220,000. During the nine months ended September
30, 1997, the Company acquired no additional land from affiliated entities
(unaudited).
F-18
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
5. Related party transactions (continued):
b. Related party lot sales:
During 1995 and 1996, the Company sold improved lots to an affiliate
which is owned by a member and manager of the Company for cash of
$2,800,535 and $7,809,928 ($5,132,208 and $3,960,111 for the nine
months periods ended September 30, 1996 and 1997 (unaudited),
respectively). At December 31, 1996, pursuant to specific performance
contracts, the Company has committed to sell 556 lots to the affiliate
upon completion of the development process for $11,488,350 (79 lots
for $2,084,200 at September 30, 1997 (unaudited)). During the nine months
ended September 30, 1997 (unaudited), the affiliate released the Company
from the majority of the specific performance contracts. The improved
lots underlying these contracts were subsequently included in option
contracts with unrelated third parties (Note 4). The option contracts
generally include escalation clauses at various rates. Based on costs
incurred through September 30, 1997, and management's estimate of costs to
complete the development, the Company does not anticipate incurring any
losses resulting from these contracts. In 1996, an additional $92,000
($525,490 during the nine months ended September 30, 1997 (unaudited))
of lot sales were made to an entity which is one-third owned by a member
of the Company. The Company has commitments to sell this entity 15 lots
for $397,500 at September 30, 1997 (unaudited).
c. Indemnification agreement:
During 1995, the Company entered into an indemnification agreement whereby
the Company indemnifies the three principal members from any liability or
expense incurred by the members under loans obtained for the benefit of
the Company for which the members provided personal guarantees.
d. Legal fees:
Three members of the Company are attorneys in a law firm which provided
significant legal services to the Company, primarily pertaining to zoning,
platting and other related services in connection with developing real
estate. Approximately $680,000 of related party legal fees were incurred
by the Company in 1995, $470,000 in 1996, $399,744 (unaudited) and
$137,862 (unaudited) for the nine months ended September 30, 1996 and
1997, respectively. At December 31, 1996, there were outstanding legal
bills due the law firm of $433,568 ($392,597 at September 30, 1997
(unaudited)).
F-19
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
5. Related party transactions (continued):
d. Legal fees (continued):
The Company has agreements with the law firm for legal fees related to
specific projects to be developed by the Company. These fees are
contingent on the completion of zoning and platting of some or all the
parcels involved. The fees incurred for such contingent legal work is
approximately $164,000 at December 31, 1996 ($185,000 at September 30,
1997 (unaudited)). However, these fees have not been billed by the law
firm and are not recorded in these financial statements.
e. Office lease:
The Company is leasing its office space under a noncancellable operating
lease expiring September 30, 1997, from an entity controlled by a member
of the Company. Rent expense under the lease for 1995 and 1996 was $43,364
and $45,852 ($30,836 and $ 54,683 for the nine months ended September 30,
1996 and 1997 (unaudited)), respectively. The future minimum rental
commitment under this lease at December 31, 1996 is $27,972, all of which
is due in 1997.
In June 1997, the Company renewed the lease for a three year period
beginning October 31, 1997. Under the terms of the new agreement, the
Company is to pay $5,773 per month for the first year with escalation
clauses in years two and three. The Company also has an agreement with the
related party law firm, whereby the law firm will reimburse the Company
$1,325 per month for office space occupied by the law firm (unaudited).
Minimum future rental commitments under this lease at September 30, 1997
are as follows (unaudited):
Three months ended December 31, 1997 $ 17,319
Year ended December 31, 1998 70,029
Year ended December 31, 1999 73,041
Year ended December 31, 2000 56,475
F-20
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
5. Related party transactions (continued):
f. Other related party transactions:
During 1995, the Company entered into employment agreements with three
members of the Company to pay them aggregate annual compensation of
$336,000 per year beginning July 1, 1994. In 1996, compensation to the
three members totaled $1,052,591, of which $293,379 was paid to or on
behalf of the members, $433,212 was paid through the assumption by the
Company of indebtedness of the managers related to development costs they
had incurred on behalf of the Company, and $326,000 has been accrued at
December 31, 1996. During the nine months ended September 30, 1996 and
1997, compensation to the three members was $417,400 and $533,822,
(unaudited) respectively; $578,000 remains unpaid at September 30, 1997
(unaudited). In addition, $183,500 was paid in 1996 as consulting fees
to entities controlled by the members.
During the nine months ended September 30, 1996 and 1997, consulting fees
paid to affiliates were $55,500 and $28,904 (unaudited), respectively.
6. Proposed public offering:
In January 1997, the Company was party to an agreement whereby the Company
would acquire a controlling interest in Gateway American Properties
Corporation (GAPC) (a reverse acquisition). According to the agreement,
the members of the Company are to contribute their ownership interest in
the Company to GAPC in return for 2,025,000 shares of GAPC common stock,
out of a total outstanding common stock of 2,352,000 shares. The exchange
is to be effective contemporaneous with the closing of a proposed public
offering. The 327,000 shares of common stock not owned by the members of
the Company will be registered contemporaneous with the shares offered in
the proposed public offering.
The proposed offering will sell 1,500,000 shares of common stock of GAPC to
the public at $4.00 per share and 3,000,000 warrants at $.1875 per
warrant, with each warrant exercisable to acquire a share of common stock
at $4.50 per share for a period of three years. The underwriter for the
proposed public offering is to receive a commission equal to ten percent
of the proceeds of the public offering plus a three percent
non-accountable expense allowance. In addition, GAPC has agreed to engage
the underwriter as a financial advisor for three years at a total fee of
$108,000, payable at the closing of the public offering. The underwriter
will also receive warrants to purchase 150,000 shares of common stock at
$6.00 per share during the five-year period commencing on the date of the
offering and warrants to purchase for $.28125 per warrant additional
warrants to purchase up to 300,000 shares of common stock exercisable at
$6.00 per share during the three-year period commencing on the date of the
offering.
F-21
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION
(A COLORADO CORPORATION)
SEPTEMBER 30,1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Gateway American Properties Corporation
Denver, Colorado
We have audited the balance sheet of Gateway American Properties Corporation as
of September 30, 1997. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Gateway American Properties
Corporation as of September 30, 1997, in conformity with generally accepted
accounting principles.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
November 19, 1997
F-23
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION
(A COLORADO CORPORATION)
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
Assets $ 100
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ NONE
===================
Shareholders' equity:
Common stock, $0.01 par value;
authorized 20,000,000 shares;
Issued and outstanding 100 shares 1
Additional paid-in capital 99
-------------------
Total liabilities and shareholders' equity $ 100
===================
See note to balance sheet.
F-24
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION
(A COLORADO CORPORATION)
NOTE TO BALANCE SHEET
SEPTEMBER 30, 1997
1. Organization and nature of business:
Gateway American Properties Corporation (the "Company") was incorporated
in March 1997 for the purpose of acquiring all of the assets of Gateway
American Properties Corporation - Florida (GAPC-F), in exchange for
327,000 shares of the Company's common stock. In addition, the Company
is party to an agreement whereby the Company is to acquire Gateway
American Properties, LLC (Gateway LLC) subsequent to its acquisition of
GAPC-F, and contemporaneous with the closing of a proposed public
offering of the Company's stock. According to the agreement, the members
of Gateway LLC are to contribute their ownership interest in Gateway LLC
in return for 2,025,000 shares of the Company's common stock.
Gateway LLC was formed in June 1994 for the purpose of acquiring, zoning,
platting, and developing real estate for residential use, into lots
available for sale to homebuilders. In certain subdivisions, the Company
also constructs homes or other buildings on properties it has developed
instead of selling the improved lots to other homebuilders.
GAPC-F is a development stage company incorporated in Florida which has
not had any significant operations.
The Company has entered into a letter of intent with an underwriter for a
public offering of its stock, whereby the Company will sell 1,500,000
shares of common stock to the public at $4.00 per share, and 3,000,000
warrants at $.1875 per warrant, with each warrant exercisable to acquire
a share of common stock at $4.50 per share for a period of three years.
The underwriter for the proposed public offering is to receive a
commission equal to ten percent of the proceeds of the public offering
plus a three percent non-accountable expense allowance. In addition, the
Company has agreed to engage the underwriter as a financial advisor for
three years at a total fee of $108,000, payable at the closing of the
public offering. The underwriter will also receive warrants to purchase
150,000 shares of common stock at $6.00 per share during the five-year
period commencing on the date of the offering and warrants to purchase
of $.28125 per warrant additional warrants to purchase up to 300,000
shares of common stock exercisable at $6.00 per share during the three
period commencing on the date of the offering.
F-25
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Interim Financial Report
September 30,1997
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Gateway American Properties Corporation
We have audited the accompanying balance sheet of Gateway American
Properties Corporation as of December 31, 1995 and 1996, and the related
statements of operations, shareholders' equity, and cash flows for the period
from January 12, 1995 (date of inception) to December 31, 1995 and for the year
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gateway American Properties
Corporation as of December 31, 1995 and 1996, and the results of its operations
and cash flows for the periods then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7 to the
financial statements, the Company's continued operations are dependent upon the
receipt of additional capital and the success of future operations, which raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Beatty & Company, P.A.
Certified Public Accountants
Sarasota, Florida
March 27, 1997 (except for Notes 5, 6, and 7, as to which the date is July 14,
1997)
F-27
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Balance Sheet
ASSETS
As of December 31 As of September 30
1995 1996 1996 1997
---- ---- ---- ----
(Unaudited)(Unaudited)
Current Assets:
Cash & Equivalents $ 76,715 $20,433 $ 30,670 $ 1,560
--------- ------- --------- --------
Other Assets:
Deferred Offering Costs $ 403,848 $31,210 $ 406,963 $ 58,134
Deposits 30,000 0 30,000 0
Organization Costs (Net) 282 211 228 158
--------- ------- --------- --------
Total Other Assets $ 434,130 $31,421 $ 437,191 $58,292
--------- ------- --------- --------
Total Assets $ 510,845 $51,854 $ 467,861 $59,852
========= ======= ========= ========
LIABILITIES & SHAREHOLDERS EQUITY
Current Liabilities:
Accounts Payable $ 28,318 $ 33,548 $ 31,229 $ 55,891
Accrued Liabilities 1,625 2,250 625 4,875
-------- -------- -------- --------
Total Liabilities $ 29,943 $35,798 $ 31,924 $ 60,766
-------- -------- -------- --------
Shareholders' Equity:
Common Stock, $.01 par value,
10,000,000 shares authorized
436,000 shares issued &
outstanding $ 4,360 $ 4,360 $ 4,360 $ 4,360
Purchase Warrants 4,000 4,000 4,000 4,000
Additional Paid-In Capital 646,538 646,538 646,538 646,538
Accumulated Development Stage
Deficit (173,996) (638,842) (218,961) (655,812)
-------- -------- -------- --------
Total Shareholders' Equity $480,902 $16,056 $435,937 $(914)
-------- -------- -------- --------
Total Liabilities &
Shareholders' Equity $510,845 $ 51,854 $467,861 $ 59,852
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Statement of Operations
<TABLE>
<CAPTION>
For the For the
Period from For the For the Period from
Inception For the Nine Months Nine Months Inception
Through Year Ended Ended Ended Through
12-31-95 12-31-96 9-30-96 9-30-97 9-30-97
-------- --------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Development Stage Revenues:
Investment income $ 11,476 $ 1,888 $ 1,491 $ 95 $ 13,459
--------- --------- -------- -------- ---------
Expenses Incurred During Development Stage:
Costs of Withdrawn Public Offering $ 0 $ 406,963 $ 0 $ 0 $ 406,963
General & Administrative Expenses 61,314 23,250 20,929 7,242 91,806
Office Expenses 48,996 10,705 8,461 7,605 67,306
Legal & Professional 18,686 20,376 13,732 2,165 41,227
Travel & Related Costs 33,684 4,812 3,000 0 38,496
Other Miscellaneous Expenses 22,792 628 334 53 23,473
--------- --------- -------- -------- ---------
Total Expenses $ 185,472 $ 466,734 $ 46,456 $ 17,065 $ 669,271
--------- --------- -------- -------- ---------
Deficit Accumulated During Development
Stage $(173,996) $(464,846) $(44,965) $(16,970) $(655,812)
========= ========= ======== ======== =========
Earnings (Loss) Per Share $ (0.48) $ (1.07) $ (0.10) $ (0.04) $ (1.60)
========= ========= ======== ======== =========
Number of shares outstanding for purposes
of computing net loss per share 361,673 436,000 436,000 436,000 408,972
========= ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Statement of Shareholders' Equity
For the Period from Inception to December 31, 1995,
for the Year Ended December 31, 1996,
and for the Nine Months Ended September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Development Total
Stock Purchase Paid-in Stage Shareholders'
$.01 Par Value Warrants Capital Deficit Equity
-------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sale of 287,346 shares of $.01
par value Common Stock and
251,346 Stock Purchase Warrants
for $384,998 less offering costs
of $59,722 $ 2,873 $ 2,513 $319,890 325,276
Sale of 22,654 shares of $.01
par value Common Stock and
22,654 Stock Purchase Warrants
for $26,000 227 227 25,546 26,000
Sale of 126,000 shares of $.01
par value Common Stock and
126,000 Stock Purchase Warrants
for $315,000 less offering costs
of $11,378 1,260 1,260 301,102 303,622
Development Stage Deficit
from inception through
December 31, 1995 (173,996) (173,996)
-------------- ----------- ---------- ------- ---------
Totals - December 31, 1995 $ 4,360 $ 4,000 $646,538 $(173,996) $ 480,902
Development Stage Deficit
accumulated from January 1, 1996
throughDecember 31, 1996 (464,846) (464,846)
-------------- ----------- ---------- ------- ---------
Totals -December 31, 1996 $ 4,360 $ 4,000 $646,538 $(638,842) $ 16,056
Development Stage Deficit
accumulated from January 1, 1997
through September 30, 1997 (Unaudited) (16,970) (16,970)
-------------- ----------- ---------- ------- --------
Totals-September 30, 1997 (Unaudited) $ 4,360 $ 4,000 $646,538 $(655,812) $914
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the For the
Period from For the For the Period from
Inception For the Nine Months Nine Months Inception
Through Year Ended Ended Ended Through
12-31-95 12-31-96 9-30-96 9-30-97 9-30-97
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows From (Used In) Financing Activities:
Sale of Common Stock & Purchase Warrants $ 725,998 $ 0 $ 0 $ 0 $ 725,998
Less Offering Costs for Private Placements (71,100) 0 0 0 (71,100)
--------- --------- --------- --------- ----------
Net Cash Flows From (Used In)Financing Activities $ 654,898 $ 0 $ 0 $ 0 $ 654,898
--------- --------- --------- --------- ----------
Cash Flows From (Used In) Investing Activities:
Deferred Offering Costs $(403,848) $ 372,638 $ (3,115) $ (26,924) $ (58,134)
Deposits (30,000) 30,000 0 0 0
Organization Costs (352) 0 0 0 (352)
--------- --------- --------- --------- ----------
Net Cash Flows From (Used In) investing Activities $(434,200) $ 402,638 $ (3,115) $ (26,924) $ (58,486)
--------- --------- --------- --------- ----------
Cash Flows From (Used In ) Operating Activities:
Development Stage Earnings (Deficit) $(173,996) $(464,846) $ (44,965) $ (16,970) $ (655,812)
Adjustments:
Amortization 70 71 54 53 194
Accounts Payable 28,318 5,230 2,981 22,343 55,891
Accrued Liabilities 1,625 625 (1,000) 2,625 4,875
--------- --------- --------- --------- ----------
Net Cash Flows From (Used In) Operating Activities $(143,983) $(458,920) $ (42,930) $ 8,051 $ (594,852)
--------- --------- --------- --------- ----------
Net Increase (Decrease) In Cash $ 76,715 $ (56,282) $ (46,045) $ (18,873) $ 1,560
Plus Beginning Cash Balance 0 76,715 76,715 20,433 0
--------- --------- --------- --------- ----------
Ending Cash Balance $ 76,715 $ 20,433 30,670 $ 1,560 $ 1,560
========= ========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-31
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Notes To Financial Statements
1. Significant Accounting Policies
A. Development Stage Operations - The Company has been in the development
stage since its inception in late 1994 and subsequent incorporation in January,
1995 as a Florida corporation. The Company's proposed business activity is to
acquire one or more other business entities and/or develop business and
investment activities satisfactory to its shareholders. Since the Company has
not yet commenced full-scale operations and no significant revenues have been
realized through December 31, 1996, the financial statements have been reported
as those of a development stage company.
B. Principles of Consolidation - In connection with its formation, the
Company merged with an affiliated entity (also a development stage company)
effective January 13, 1995. The transaction has been accounted for as a pooling
of interests and, accordingly, the financial statements have been consolidated
to include the accounts of both companies, after elimination of all significant
intercompany balances and transactions.
C. Income Taxes - The Company's accounting policies for financial statement
purposes and income tax reporting purposes may vary due to timing and other
differences. Certain operating losses sustained to date may be offset against
taxable income of future periods.
D. Private Offering Costs - Since the Company has successfully completed
its initial private offerings of common stock, the related costs (which consist
primarily of placement and legal fees) have been offset against the additional
paid-in capital as of December 31, 1995 and 1996.
E. Organization Costs - The costs of organizing the Company, which consist
primarily of legal and filing fees incurred in the process of incorporation,
have been capitalized and are being amortized over a period of sixty months.
F. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
various estimates and assumptions that affect the amounts reported in the
financial statements and the disclosures in the accompanying footnotes. Actual
results may differ from such estimates and the differences may be significant.
G. Reclassifications - Certain amounts reported in the 1995 financial
statements have been reclassified to conform to classifications used in the 1996
financial statements.
F-32
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Notes To Financial Statements
2. Related Party Transactions
A. Legal Matters - An individual who is an officer, director, and
shareholder of the Company is also an officer, director, and shareholder of the
law firm which was engaged by the Company to handle its incorporation, offerings
of securities, and other legal matters. Additionally, the Company intends to
further use such professional services with regard to future legal matters. The
total of all such related party legal fees (inclusive of expense reimbursements)
was $204,441 through December 31, 1995 and $15,802 for the year ended December
31, 1996.
B. Executive Employment Agreement - Subsequent to the approval of the
Company's Compensation Committee, an executive employment agreement was reached
with an individual who is an officer, director, and shareholder of the Company.
Although the contract requires annual basic compensation of $120,000, plus
various benefits, for a two-year period of time beginning upon the successful
completion of the Company's anticipated public offering, management intends to
replace such contract with an agreement for a one-time payment of $37,500 as
specified in the Letter of Intent with the Company's underwriter.
C. Office Rent Agreement - An informal agreement was entered into to rent
furnished office space from a company that is controlled by an individual who is
also an officer, director, and shareholder of the Company. The agreement, which
has been classified as an operating lease, requires weekly payments of $125 and
has no definitive time period.
3. Shareholders' Equity
A. Common Stock - As of December 31, 1995 and 1996, the Company has issued
436,000 shares of its 10,000,000 authorized shares of common stock with a par
value of $.01 per share.
B. Stock Purchase Warrants - The Company has also issued 400,000 stock purchase
warrants in connection with the organization of the Company. Terms of the
warrants entitle holders to purchase one additional share of the Company's
common stock for each warrant at a price of $3.375 per share at any time during
the three-year exercise period.
F-33
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Notes To Financial Statements
4. Loss Per Share
For the periods from inception through December 31, 1995 and 1996, the loss
per share is based upon the weighted average number of common shares
outstanding. The Company's stock purchase warrants have not been considered to
be common stock equivalents in the computation of loss per share because they
are anti-dilutive.
5. Deferred Offering Costs
As of December 31, 1996, the Company has deferred $31,210 in costs
incurred which pertain to its revised proposed public offering. If the offering
is successful, those costs will be charged against the proceeds of the offering.
In the event the offering is withdrawn (as the initial proposed public offering
was during 1996), such costs will be charged to current operations. Such public
offering is not expected to proceed further, however, until the outcome of the
business combination discussed below in Note 6 is determined.
6. Subsequent Events
Subsequent to the date of the financial statements, the Company
entered into agreements involving two other companies, both of which are
domiciled in the state of Colorado. The agreements, one of which is contingent
upon the successful completion of a proposed public offering, would result in
all three companies combining, in effect, to become a single business entity. In
the event such agreements are successfully concluded, the Company's shareholders
will have the right to exchange their common shares and purchase warrants for
common shares and warrants in the new publicly traded entity.
7. Anticipated Business Combination & Use of Cash
Although the December 31, 1996 cash balance of $20,433 has not been
formally restricted, the Company expects to consume the majority of its cash
reserves to facilitate its anticipated business combinations as discussed in
Note 6. Therefore, the amount of funds available for use in the Company's
proposed business activities (as outlined in Note 1) will be limited to those
funds, if any, available subsequent to such expenditures. Continued operations
are thus dependent upon the receipt of additional capital and the success of
future operations.
F-34
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Notes To Financial Statements
8. Interim Financial Statements (Unaudited)
The financial statements as of September 30, 1996 and 1997, and for the periods
then ended are unaudited. However, it is the opinion of the Company's management
that all adjustments necessary for a fair presentation of the financial
statements have been appropriately included.
F-35
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AND STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed financial statements give effect to
the proposed business combination of Gateway American Properties Corporation
(Colorado) (the Registrant), Gateway American Properties, LLC, and Gateway
American Properties Corporation (Florida) on a purchase accounting basis. The
pro forma condensed balance sheet assumes that the business combination was
effective on September 30, 1997, and combines the audited September 30, 1997
balance sheet of Gateway American Properties Corporation (Colorado) and the
unaudited interim September 30, 1997 balance sheets of Gateway American
Properties, LLC and Gateway American Properties Corporation (Florida). The pro
forma condensed statement of operations for the year ended December 31, 1996,
was prepared based upon the historical audited statements of operations of
Gateway American Properties, LLC and Gateway American Properties Corporation
(Florida) for the year ended December 31, 1996. The pro forma condensed
statement of operations for the nine months ended September 30, 1997, was
prepared based upon the unaudited interim statements of operations of Gateway
American Properties, LLC, and Gateway American Properties Corporation (Florida)
for the nine months ended September 30, 1997. The pro forma statement of
operations for each period was prepared assuming the business combination was
effective at the beginning of each period presented.
These pro forma condensed financial statements should be read in conjunction
with the accompanying notes to the pro forma condensed financial statements, the
historical financial statements and notes of Gateway American Properties
Corporation (Colorado), Gateway American Properties, LLC, and Gateway American
Properties Corporation (Florida), all of which are included elsewhere herein.
The unaudited pro forma condensed statements of operations are not necessarily
indicative of future operations or the actual results that would have occurred
had the business combination been consummated at the beginning of each period
presented. Also, because of seasonal and other factors, the results of
operations for the nine months ended September 30, 1997, are not necessarily
indicative of expected results for the fiscal year ending December 31, 1997.
F-36
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
PRO FORMA CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
Gateway Gateway
American American
Properties Gateway Properties Pro Forma
Corporation American Corporation Adjustments
(Colorado) Properties LLC (Florida) (Note 2) Pro Forma
----------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash $ 100 $ 19,290 $ 1,560 $ 20,950
Accounts receivable 58,750 58,750
Accounts receivable,
related party 570,527 570,527
Deposits 72,500 72,500
Land under development 21,543,952 21,543,952
Due from Metro and general
improvement districts
Related parties 1,432,060 1,432,060
Other 161,638 161,638
Loan fees and other assets 342,336 58,292 400,628
--------- ---------- --------- ---------- ----------
Total assets $ 100 $24,201,053 $ 59,852 $ $24,261,005
========= ========== ========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 923,633 $ 60,766 $ 984,399
Accounts payable,
related parties 802,516 802,516
Property taxes payable 58,200 58,200
Customer deposits 338,500 338,500
Notes payable:
Private placements 4,000,000 4,000,000
Banks 12,225,169 12,225,169
Related parties 2,500,219 2,500,219
Other 2,395,269 2,395,269
--------- ---------- ---------- ---------- ----------
Total notes payable 21,120,657 21,120,657
--------- ---------- ---------- ---------- ----------
Total liabilities 23,243,506 60,766 23,304,272
--------- ---------- ---------- ---------- ----------
Minority interest 111,403 111,403
Shareholders' equity:
Preferred stock
Common stock $ 1 4,360 $ 19,159(a) 23,520
Additional paid-in capital 99 646,538 171,173(a) 817,810
Common stock
subscriptions receivable
Stock purchase warrants 4,000 4,000
Accumulated deficit (655,812) 655,812(a)
Members' equity 846,144 (846,144)(a)
--------- ---------- ---------- ---------- ----------
Shareholders' equity 100 846,144 (914) 845,330
--------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity $ 100 $24,201,053 $ 59,852 $ $24,261,005
========= ========== ========== ========== ==========
</TABLE>
See notes to unaudited pro forma condensed financial statements.
F-37
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Gateway Gateway
American American
Properties Gateway Properties Pro Forma
Corporation American Corporation Adjustments
(Colorado) Properties LLC (Florida) (Note 2) Pro Forma
----------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales:
Related party $ 4,485,601 $4,485,601
Other 2,260,944 2,260,944
--------- ---------
6,746,545 6,746,545
Cost of sales 5,353,431 5,353,431
--------- ---------
1,393,114 1,393,114
General and
administrative expenses 791,076 $ 17,065 808,141
--------- --------- --------
Operating income (loss) 602,038 (17,065) 584,973
Interest (expense) income (3,357) 95 (3,262)
---------- --------- ---------- ---------
Income (loss) before
minority interest 598,681 (16,970) 581,711
Minority interest in
income of consolidated
joint ventures 75,335 75,335
---------- --------- ---------- ---------
Income (loss) before
income taxes 523,346 (16,970) 506,376
Provision for income taxes $ 202,500(b) 202,500
---------- --------- ---------- ---------
Net income (loss) $ 523,346 $ (16,970)$ (202,500) $ 303,876
========== ========= ========== =========
Net income (loss) per
common share before
initial public offering $ (.05) $ .13
========= =========
Average shares outstanding 327,000 2,025,000 2,352,000
========= ========== =========
Net income (loss) per
common share after
initial public offering $ (.05) $ .08
========= =========
Average shares outstanding 327,000 3,525,000 3,852,000
========= ========= =========
</TABLE>
See notes to unaudited pro forma condensed financial statements.
F-38
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (CONTINUED)
(Unaudited)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Gateway Gateway
American American
Properties Gateway Properties Pro Forma
Corporation American Corporation Adjustments
(Colorado) Properties LLC (Florida) (Note 2) Pro Forma
----------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales:
Related party $ 7,901,928 $ 7,901,928
Other 2,598,678 2,598,678
---------- ----------
10,500,606 10,500,606
Cost of sales 9,549,080 9,549,080
---------- ----------
951,526 951,526
General and
administrative expenses 791,522 $ 466,734 1,258,256
---------- --------- ----------
Operating income (loss) 160,004 (466,734) (306,730)
Interest income 1,450 1,888 3,338
---------- --------- ----------
Income (loss) before
minority interest 161,454 (464,846) (303,392)
Minority interest in
income of consolidated
joint ventures 52,010 52,010
---------- --------- ----------
Income (loss) before
income taxes 109,444 (464,846) (355,402)
Provisions for income taxes $ 31,400(b) 31,400
---------- --------- --------- ----------
Net income (loss) $ 109,444 $ (464,846) $ (31,400) $ (386,802)
========== ========= ========= ==========
Net income (loss) per
common share before
initial public offering $ (1.42) $ (.16)
========= ==========
Average shares outstanding 327,000 2,025,000(c) 2,352,000
========= ========= ==========
Net income (loss) per
common share after
initial public offering $ (1.42) $ (.10)
========= ==========
Average shares outstanding 327,000 3,525,000(d) 3,852,000
========= ========= ==========
</TABLE>
See notes to unaudited pro forma condensed financial statements.
F-39
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Merger
Pursuant to the terms of the Agreement Providing for Sale and Exchange of
Capital Stock as amended (the Transaction Agreement), effective October 1,
1997, the shareholders of Gateway American Properties Corporation
(Florida) received 327,000 shares of Gateway American Properties
Corporation (Colorado) common stock in exchange for the net assets of
Gateway American Properties Corporation (Florida). In addition, members of
Gateway American Properties, LLC will receive 2,025,000 shares of Gateway
American Properties Corporation common stock in exchange for their
membership interest which will occur on the effective date of the initial
public offering contemplated by this registration statement. Under the
terms of the Transaction Agreement, the issuance of 1,500,000 shares of
Gateway American Properties Corporation common stock at $4.00 per share to
purchasers in the initial public offering in exchange for the offering
proceeds is an integral part of the business combination transaction, and
the business combination transaction that is to be completed on the
effective date or immediately prior to the initial public offering is
conditional upon the successful completion of the initial public offering.
For financial accounting purposes, the pro forma financial statements
assume that the business combination transaction will be accounted for
under purchase accounting; for statement of operations purposes, the
business combination transaction was effective as of the beginning of each
period presented; and for balance sheet purposes, the business combination
transaction was effective on September 30, 1997. Because the
business combination is a reverse acquisition, the assets and liabilities
of Gateway American Properties, LLC will be reflected in the balance
sheet subsequent to the merger at historical cost and no goodwill will be
recorded. Furthermore, notwithstanding that the initial public offering
is an integral part of the business combination transaction, the pro forma
financial statements give no effect to the proceeds of the initial public
offering except that the net income (loss) per common share after the
initial public offering assumes that 1,500,000 common shares will be
outstanding in conjunction with the proposed initial public offering.
2. Pro forma adjustments:
a. For financial accounting purposes, the business combination is assumed to
be a reverse acquisition. Since 2,352,000 shares of Gateway American
Properties Corporation (Colorado) common stock (par value $.01) will be
outstanding, common stock was increased $19,159 and additional paid-in
capital was increased by $171,173. This was offset against the elimination
of Gateway American Properties, LLC members' equity of $846,144, and the
reclassification of Gateway American Properties Corporation (Florida)
accumulated deficit into additional paid-in capital.
F-40
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. Pro forma adjustments (continued):
The balance sheet does not give effect to the increase in cash, common
stock and additional paid-in capital that would be realized with the
proposed initial public offering of 1,500,000 common shares and 3,000,000
warrants. The initial public offering will occur in conjunction with the
business combination.
b. Gateway American Properties, LLC, as a limited liability company, did
not pay income taxes. For purposes of determining the pro forma effect of
the business combination, income tax expense has been computed as if
Gateway American Properties, LLC had been a C corporation. The income tax
provision assumes that Gateway American Properties, LLC had adopted SFAS
No. 109, Accounting for Income Taxes. The balance sheet effect of adopting
SFAS No. 109 would not be material.
c. The pro forma net income (loss) per common share before initial public
offering reflects the additional common shares that will be outstanding
after the business combination (see Note 1), but does not give effect to
additional common shares that would be issued under the initial public
offering.
d. The pro forma net income (loss) per common share after initial public
offering reflects the additional common shares that will be outstanding
after the consummation of the business combination (see Note 1) and the
proposed initial public offering which will occur in conjunction with the
business combination. The calculation does not give any effect to the
proceeds that will be received under the initial public offering.
F-41
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or the Underwriter. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy the Units
of the Company to any person in any jurisdiction or in any circumstances in
which such offering would be unlawful. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
TABLE OF CONTENTS
Introductory Statement........................ 4
Prospectus Summary............................ 6
Risk Factors.................................. 10
Use of Proceeds............................... 18
Selected Financial Information................ 20
Management's Discussion and Anal-
ysis of Results of Operations............... 23
Dilution...................................... 28
Pro Forma Capitalization...................... 29
Dividend Policy............................... 29
Business...................................... 30
Certain Transactions.......................... 38
Management.................................... 43
Principal Shareholders........................ 49
Underwriting.................................. 50
Description of Securities..................... 54
Selling Stockholders.......................... 57
Legal Matters................................. 57
Experts....................................... 57
Additional Information........................ 58
Index to Financial Statements................ F-1
Until [________________], 1998, all dealers affecting transactions in the
registered securities, whether or not participating in the distribution thereof,
may be required to deliver a Prospectus. This is in addition to the obligation
of dealers to deliver a Prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
1,500,000 shares of Common Stock
and
3,000,000 Redeemable Common
Stock Purchase Warrants
GATEWAY AMERICAN PROPERTIES
CORPORATION
------------------------------------
P R O S P E C T U S
------------------------------------
BARRON CHASE SECURITIES, INC.
7700 West Camino Real, Suite 200
Boca Raton, Florida 33433-5541
(561) 347-1200
Atlanta, Georgia
Beverly Hills, California
Boston, Massachusetts
Chicago, Illinois
Clearwater, Florida
Duluth, Georgia
East Boca Raton, Florida
Edison, New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrook Heights, New Jersey
Hoopeston, Illinois
La Jolla, California
Minneapolis, Minnesota
Naples, Florida
New York, New York
Orlando, Florida
Sarasota, Florida
Tampa, Florida
Tulsa, Oklahoma
[_____________], 1998
<PAGE>
(ALTERNATE PROSPECTUS)
SUBJECT TO COMPLETION DATED ______________, 1998
PROSPECTUS
GATEWAY AMERICAN PROPERTIES CORPORATION
627,000 Shares of Common Stock
--------------------
This Prospectus relates to 627,000 shares of Common Stock (the "Selling
Stockholders Shares") for resale by certain of its stockholders (the "Selling
Stockholders"). The Selling Stockholders Shares include 327,000 presently
outstanding shares of Common Stock and 300,000 shares underlying outstanding
Common Stock Purchase Warrants ("Founders Warrants") exercisable at $4.50 per
share during a five-year period beginning with the effective date ("Effective
Date") of the Registration Statement of which this Prospectus is a part.
Pursuant to certain "lock-up provisions" between the Selling Stockholders and
Barron Chase Securities, Inc. (the "Representative") acting as representative of
the several underwriters ("Underwriters") of the public offering hereinafter
described, 300,000 of the presently outstanding Selling Stockholders Shares and
the 300,000 shares underlying the Founders Warrants may not be sold for 15
months from the Effective Date without the consent of the Representative. The
remaining 27,000 Selling Stockholders Shares may not be sold for 90 days from
the Effective Date. See "DESCRIPTION OF SECURITIES - Shares Eligible for Future
Sale".
The Registration Statement of which this Prospectus is a part also
includes 1,500,000 shares of Common Stock and 3,000,000 Redeemable Common Stock
Purchase Warrants (the "Warrants") being offered by the Company through an
offering underwritten by the Underwriters. The Company has granted the
Underwriters an option, exercisable within 45 days after the Effective Date to
purchase up to 225,000 additional shares of Common Stock and 450,000 additional
Warrants. See "Underwriting".
None of the 627,000 Selling Stockholders Shares are being underwritten by
the Underwriter and the Company will not receive any of the proceeds from the
sale of the Selling Stockholders Shares. See "SELLING STOCKHOLDERS".
Application has been made to list the Common Stock and Warrants of the
Company on Nasdaq SmallCap under the symbols ___ and ___W respectively.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. See
"RISK FACTORS" beginning on page 10 for a discussion of certain risk factors
that should be considered by prospective investors of the securities offered
hereby.
The date of this Prospectus is____________, 1998
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. Information
contained herein is subject to completion or amendment. The securities may not
be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell of the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
- --------------------------------------------------------------------------------
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. Information
contained herein is subject to completion or amendment. These securities may not
be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell of the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
- --------------------------------------------------------------------------------
<PAGE>
At the Effective Date, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act")
and, in accordance therewith, will be required to file reports, proxy or
information statements and other information with the Securities and Exchange
Commission (the "Commission"). At the Effective Date, the Securities will be
listed on Nasdaq SmallCap. Accordingly, such reports, proxy statements and other
information can be inspected and copied at the Commission's principal office,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; the
Northeast Regional Office of the Commission at 7 World Trade Center, Suite 1300,
New York, New York 10048; and the Midwest Regional Office of the Commission,
Citicorp Center, 500 West Madison street, Suite 1400, Chicago, Illinois 60661,
where copies may be obtained upon payment of the fees prescribed by the
Commission, as well as at the offices of The Nasdaq Stock Market, Inc., 1735 K
Street, N.W., Washington, D.C. Such documents may also be obtained through the
website maintained by the Commission at http://www.sec.gov. Holders of the
Company's Common Stock and Warrants will be able to obtain the most recent such
reports by making written requests therefore to the Company's offices located at
9145 East Kenyon Avenue, Suite 200, Denver, Colorado 80237, Attention: Joel H.
Farkas. The Company's telephone number at such address is 303/843-9742.
2
<PAGE>
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK
AND THE WARRANTS OF THE COMPANY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
At the Effective Date, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act")
and, in accordance therewith, will be required to file reports, proxy or
information statements and other information with the Securities and Exchange
Commission (the "Commission"). At the Effective Date, the Securities will be
listed on Nasdaq SmallCap. Accordingly, such reports, proxy statements and other
information can be inspected and copied at the Commission's principal office,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; the
Northeast Regional Office of the Commission at 7 World Trade Center, Suite 1300,
New York, New York 10048; and the Midwest Regional Office of the Commission,
Citicorp Center, 500 West Madison street, Suite 1400, Chicago, Illinois 60661,
where copies may be obtained upon payment of the fees prescribed by the
Commission, as well as at the offices of The Nasdaq Stock Market, Inc., 1735 K
Street, N.W., Washington, D.C. Such documents may also be obtained through the
website maintained by the Commission at http://www.sec.gov. Holders of the
Company's Common Stock and Warrants will be able to obtain the most recent such
reports by making written requests therefore to the Company's offices located at
9145 East Kenyon Avenue, Suite 200, Denver, Colorado 80237, Attention: Joel H.
Farkas. The Company's telephone number at such address is 303/843-9742.
3
<PAGE>
INTRODUCTORY STATEMENT
----------------------
Apollo III, Inc., a Florida Corporation ("Apollo") was organized on
December 23, 1992 for the purpose of acquiring or consolidating with one or more
other business entities. Gateway American Properties, LLC, a Colorado limited
liability company ("Gateway LLC") was organized in June of 1992; and since then
has been engaged in the business of purchasing and developing real property into
platted, finished and semi-finished lots for sale to residential homebuilders.
In the fall of 1994, representatives of Apollo and Gateway LLC entered into
negotiations relative to a business combination of these entities which would
also involve and be contingent upon the concurrent acquisition of capital from a
public offering of securities.
In January of 1995, Apollo and Gateway LLC reached an understanding in
principle regarding the proposed business combination project. On January 12,
1995, Apollo formed Gateway American Properties Corporation, a Florida
corporation ("Gateway American-Florida"), as an affiliate for the purpose of
participating in the business combination. In early April 1995, Apollo, Gateway
American-Florida, Gateway LLC and the owners of Gateway LLC entered into an
agreement effective as of January 27, 1995 which agreement provided for: (i) the
merger of Apollo into Gateway American-Florida; (ii) the acquisition by Gateway
American-Florida of all the outstanding membership interests in Gateway LLC; and
(iii) the acquisition of capital from a public offering of securities of Gateway
American-Florida. On April 10, 1995, the parties to the proposed business
combination entered into a Letter of Intent with the Representative for the
underwriting of the public offering of securities included therein; and on
October 11, 1995 Gateway American- Florida filed a Registration Statement with
the Securities and Exchange Commission covering the proposed public offering of
its securities. After this Registration Statement was filed, a difference of
opinion developed between Apollo and Gateway American-Florida and the
Representative involving the terms of the business combination and the public
offering principally relating to the amount of securities to be received in the
business combination by the shareholders of Apollo and Gateway American-Florida,
the owners of Gateway LLC and the purchasers in the public offering.
Accordingly, the prior Registration Statement was withdrawn and the project was
delayed, pending the renegotiation of the terms of the business combination and
public offering. Apollo paid all of the expenses relating to the January 27,
1995 agreement and the prior Registration Statement utilizing the invested funds
of the holders of the outstanding equity security holders.
In January of 1997, the parties reached an understanding on the revisions
to the business combination and offering terms and work on the project was
resumed. Apollo was merged into Gateway American-Florida effective for
accounting purposes as of January 13, 1995. Since all of the assets and
operations of Gateway LLC are located in Colorado and it is not anticipated that
there will be any future operations in Florida, it was concluded that the
business combination should include the redomestication of Gateway
American-Florida as a Colorado corporation. Accordingly, Gateway American
Properties Corporation, a Colorado corporation ("Company") was formed for that
purpose on March 21, 1997. Effective as of January 27, 1997, Gateway
American-Florida, the Company, Gateway LLC and the owners of Gateway LLC entered
into an agreement providing for the business combination ("Combination
Agreement"). The Combination Agreement entirely superceded and replaced the
agreement of January 27, 1995 relating to the business combination.
Pursuant to the Combination Agreement on October 8, 1997 Gateway
American-Florida was redomesticated into a Colorado corporation through a
statutory merger with the Company as the surviving corporation. In this merger
the shareholders of Gateway American-Florida received 327,000 shares of the
Company's Common Stock and Common Stock Purchase Warrants to purchase 300,000
shares of the Common Stock ("Founders Warrants"). The Founders Warrants are
exercisable at $4.50 per share on the same terms and conditions as the Purchase
Warrants offered to the public by this Prospectus. Gateway American-Florida and
Apollo are both considered as "predecessors" of the Company as that term is
defined under the Securities Act of 1933, as amended.
4
<PAGE>
Under the Combination Agreement and immediately prior to the Effective Date
of the Registration Statement of which this Prospectus is a part, the parties
will complete and consummate the business combination transaction in which the
Company will acquire all of the outstanding membership interests of Gateway LLC,
in exchange for 2,025,000 shares of Common Stock subject only to the completion
of the public offering. Such transaction is referred to in this Prospectus as
the "Transaction". See "CERTAIN TRANSACTIONS".
Upon completion of the Transaction, the Company will continue the business
activities of Gateway LLC directly or through Gateway LLC as a wholly owned
subsidiary. The management of the Company does not believe that the present is
an appropriate time to make a definite decision whether or not to continue
operating Gateway LLC as a subsidiary or to merge it into the Company or to
liquidate its assets or operations into the Company and conduct all future
operations directly out of the Company. See "PROSPECTUS SUMMARY" and "BUSINESS".
Unless otherwise indicated, the information presented in this Prospectus
reflects and assumes the consummation of the Transaction and refers to the
Company and Gateway LLC as a combined entity.
The following chart reflects the corporate structure and history of the Company.
Apollo Gateway American-Florida
COMPANY PREDECESSOR COMPANY PREDECESSOR
------------------- --------->> -------------------
Apollo III, Inc., Gateway American Properties
a Florida Corp. Merged into Corporation, a Florida Corp.
Formed 12/92 to Pursue as of 1/9/95 Founded 6/92 as Transactional
Business Combination Vehicle |
|
|
Merged into on 10/8/97 |
THE COMPANY |
----------- <<-------
Gateway American Properties Corporation,
a Colorado Corp.
Formed 3/97 to Merge with
Gateway American-Florida, Acquire <<-------
Gateway LLC and Make Public Offering |
|
|
Acquired Effective Date |
SUBSIDIARY OF COMPANY |
--------------------- |
GAP LLC, |
a Colorado limited liability company |
formed 6/92 to Acquire, Develop and Sell -----
Real Estate for Residential Building
5
<PAGE>
PROSPECTUS SUMMARY
------------------
Set forth below is a summary of certain information contained in this
Prospectus. Such information is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
The Company
-----------
The Company was formed pursuant to Colorado law on March 21, 1997. For the
past four years its subsidiary, Gateway LLC, has been engaged in the business of
purchasing and developing real property into platted, finished and semi-finished
lots for sale to residential homebuilders. Gateway LLC typically purchases real
property that is zoned for residential use and develops such property into
finished lots for sale to homebuilders who will construct single family detached
or multi-family attached homes on the finished lots. Homes constructed on these
lots are generally priced between $100,000 and $250,000. Gateway LLC seeks to
provide its home builder customers with (i) approved and platted finished or
semi-finished residential building sites, (ii) a variety of geographical
locations, and (iii) delivery within time frames which meet the home builders'
needs. The Company was formed for the purpose of acquiring Gateway LLC and the
capital funds from this offering and continuing the operations of Gateway LLC
directly or through it as a subsidiary. See "INTRODUCTORY STATEMENT" and
"CERTAIN TRANSACTIONS".
Gateway LLC (including GV Development, LLC, a predecessor of Gateway LLC
which was merged into Gateway LLC on December 31, 1994) was organized in June,
1993. From its organization through September 30, 1997, the Company's lot sales
have increased from fewer than 20 lots sold in 1994, to 194 lots sold in 1995
and to 478 lots in 1996. For the nine month period ending September 30, 1997,
Gateway LLC has sold 340 lots. As of September 30, 1997, it had an inventory of
1406 lots which have been zoned and platted and an additional 526 that are under
development. Its lots in inventory and lots under contract are located in eight
cities and counties in the greater Denver metropolitan area and in Fort Collins,
Colorado.
Presently the home builders who have acquired lots, or are presently under
contract to acquire lots from the Company are PrideMark Home Building Group LLC
("PrideMark"), US Home, Melody Homes, Sheffield Homes, Continental Homes,
Sundown Development, Paul Adam Custom Homes, d/b/a Odyssey Homes, Meadow Homes
and Strauss Homes. PrideMark is a private corporation principally owned by
Michael A. Messina, who is also a director, officer and principal shareholder of
the Company. Accordingly, PrideMark is an "affiliate" of the Company as that
term is defined under the Securities Act of 1933, as amended. PrideMark has
historically been the principal purchaser of lots from the Company. Since
PrideMark is a private company, purchasers of the offered securities will not be
able to obtain financial information on PrideMark. See "RISK FACTORS - Majority
of Lots Sold to Affiliated Party". The Company is also engaged in building
luxury townhomes in Roxborough Park in Douglas County, Colorado, on property it
owns and has developed. The Company may, from time to time, engage in such
building activities. See "BUSINESS", "CERTAIN TRANSACTIONS", "MANAGEMENT" and
"PRINCIPAL SHAREHOLDERS".
6
<PAGE>
Certain Transactions with Affiliates
------------------------------------
Historically, over 50% of the Company's real property purchases have been
from affiliated parties. These transactions have involved 12 property purchases
with an aggregate purchase price paid by Gateway LLC of approximately
$8,965,165. The approximate aggregate cost of these properties to the sellers
was $4,803,380, resulting in an approximate gross aggregate profit to the
sellers of $4,161,785. Of this gross aggregate profit, approximately $3,011,501
inured to the benefit of Messrs. Deutsch, Farkas and Messina, officers and
directors of the Company through their interests in the selling entities. The 12
purchased properties were held by the selling entities for periods of up to 53
months with an average per property holding period of approximately 20 months.
For details on these transactions, see "CERTAIN TRANSACTIONS - Certain
Purchase/Sale Transactions". In addition, Gateway LLC purchased all of the
membership interests, at a price equal to the aggregate capital accounts of the
members, of Sterling Hills, Ltd. Of the total purchase price, an aggregate of
$265,664 inured to the benefit of Messrs. Deutsch, Farkas and Messina. See
"CERTAIN TRANSACTIONS - Certain Purchase/Sale Transactions - Property Purchases
from Affiliates", and Footnote 5 to the table therein. The Company plans to
reduce such transactions in the future and has taken steps over the past two
years toward that end. The Company and the involved affiliated parties have
agreed that on any such future purchases the Company will pay a purchase price
of 10% below the fair market value of the properties, based upon independent
expert appraisals. The appraiser used in the prior property purchases has had no
existing relationship to the Company, Gateway LLC or any of their affiliates;
and in most cases the appraisals were prepared for the independent financial
institution providing the financing for the purchase. All future appraisals will
be obtained from independent appraisers.
For the 33 month period beginning January 1, 1995, 68% of the finished and
semi-finished lots sold by the Company have been sold to the affiliate,
PrideMark. Over the next 12 months it is anticipated that the Company will
continue to sell between one-third and one-half of its platted, semi-finished
and finished lots to PrideMark. Thus, PrideMark has historically been the
principal purchaser of lots from the Company. Since PrideMark is a private
company, purchasers of the offered securities will not be able to obtain
Financial information on PrideMark. See "RISK FACTORS - Majority of Lots Sold to
Affiliated Party".
In addition, the Company utilizes legal services from a law firm of which
Mr. Deutsch, an officer, director and principal shareholder of the Company, is a
shareholder and principal. Mr. Deutsch has agreed that commencing on the
Effective Date, he will have no economic interest in any legal fees paid by the
Company to the law firm for services rendered subsequent to the Effective Date.
For additional information on transactions with affiliated parties, see
"RISK FACTORS" and "CERTAIN TRANSACTIONS".
7
<PAGE>
The Offering
------------
Common Stock offered 1,500,000 Shares
Warrants offered 3,000,000 Warrants
Common Stock to be outstanding after
the Offering(without any Warrant Exercise 3,852,000 Shares
Proposed Nasdaq SmallCap Symbols Common Stock Warrants
____________ ______-W
The number of shares of Common Stock and Warrants to be outstanding as
reflected above does not take into account additional shares of Common Stock and
Warrants which may be outstanding to the extent that the Over-Allotment Option
granted to the Underwriters is utilized. The information presented above also
does not take into account warrants which are being granted to the
Representative.
Use of Proceeds
---------------
None of the proceeds from the sales by Selling Stockholders will go to the
Company.
Risk Factors
------------
An investment in the Common Stock and Warrants of the Company involves a
substantial degree of risk and should not be made by investors who cannot afford
the loss of their entire investment in such securities. See "RISK FACTORS".
Unaudited Selected Pro Forma Financial Data
-------------------------------------------
The unaudited pro forma selected financial data as of September 30, 1997
and for the year ended December 31, 1996 and the nine months ended September 30,
1997 are derived from the unaudited pro forma condensed balance sheet and
statements of operations set forth subsequently in this Prospectus, which give
effect to the Transaction in the manner described in the notes to the pro forma
condensed financial statements. The pro forma selected financial data presented
below and the pro forma condensed financial statements should be read in
conjunction with the accompanying notes to the pro forma condensed financial
statements, the historical financial statements and the notes of each of the
respective companies, all of which are included subsequently in this Prospectus.
The unaudited pro forma condensed statements of operations are not necessarily
indicative of future operations or the actual results that would have occurred
had the Transaction been consummated at the beginning of each period presented.
8
<PAGE>
Gateway American Properties, Corp.
(A Colorado Corporation)
Unaudited Pro Forma Selected Financial Data
Giving Effect to the Transaction and Offering
Year Ended Nine Months
December 31, Ended September 30,
1996 1997
------ ------
Income Statement Data:
Sales $10,500,606 $6,746,545
Gross Profit(1) 951,526 1,393,114
Operating Income (Loss) (306,730) 584,973
Net Income (Loss) (386,802) 303,876
Net Income (Loss) per Common Share(2) (.10) .13
As adjusted for
September 30, 1997 Offering
------------------ --------
Balance Sheet Data:
Total Assets(3) $24,261,005 $27,147,255
Debt(3) 23,304,272 20,704,272
Stockholders' Equity 845,330 6,331,580
- ------------
(1) Gross profit is defined as total sales less cost of sales.
(2) Net income per common share reflects the 1,500,000 Shares that will be
outstanding after the consummation of the Transaction and the offering
described in this Prospectus which will occur in conjunction with and as a
part of the Transaction. These income calculations do not give any effect
to the proceeds that will be received pursuant to the offering described in
this Prospectus.
(3) Consistent with industry standards, assets and liabilities are not
classified as either current or long term and, therefore, information
relating to such classifications is not presented.
The SELECTED FINANCIAL INFORMATION section of this Prospectus sets forth
selected historical financial data for Gateway LLC, and the Company and pro
forma financial data, assuming the consummation of the Transaction described in
the Prospectus sections "INTRODUCTORY STATEMENT" and "CERTAIN TRANSACTIONS", all
as of the dates described in the historical financial statements of Gateway LLC,
Apollo and the Company and in the pro forma financial statements.
9
<PAGE>
RISK FACTORS
------------
The securities offered by this Prospectus involve a high degree of risk and
should be considered speculative securities. Investors should not purchase any
of the offered securities unless they can afford to lose their entire
investment. Additionally, the business activities of the Company which relate to
the acquisition of real property for further development into platted,
semi-finished and finished residential building lots are subject to being
affected in an adverse material way by the risk factors set forth below.
Interested investors should carefully consider the following risks relative to
the Company, its business and the offered securities in determining whether to
purchase the Common Stock and Warrants of the Company.
Substantial and Immediate Dilution and Benefit to Present Stockholders.
This offering involves immediate dilution of $2.43 per share (approximately
60.75% of the per share offering price) between the pro forma net tangible book
value per share of Common Stock after the offering of $1.57 (34.25%) and the
public offering price of $4.00 per share. The existing stockholders of the
Company have acquired their shares of Common Stock at an average consideration
per share of $.34, which is nominal in comparison to the $4.00 per share public
offering price. Accordingly, purchasers of the Common Stock and Warrants offered
hereby will bear substantially all of the financial risks inherent in an
investment in the Company during the immediate to near term future time. See
"DILUTION".
Continuation of Voting Control by Management. As of the Effective Date, the
officers and directors, members of their families and trusts created for members
of their families, own of record and beneficially 1,822,500 shares of Common
Stock of the Company, constituting 47.3% of all Shares to be outstanding at the
conclusion of the offering made hereby if the Over-Allotment Option is not
utilized and 45.5% of Shares to be outstanding at the conclusion of the offering
if the Over-Allotment Option is utilized in its entirety. All 2,025,000 shares
of Common Stock issued for the membership interests in Gateway are subject to a
Voting Trust Agreement, pursuant to which Messrs. Deutsch, Farkas and Messina
have the voting rights for such Shares. The Voting Trust Agreement gives Messrs.
Deutsch, Farkas and Messina voting control over 52.5% of all Shares to be
outstanding at the conclusion of the offering made hereby if the Over-Allotment
Option is not utilized and 50.6% of the Shares to be outstanding at the
conclusion of this offering if the Over- Allotment Option is exercised in its
entirety. Accordingly, as a practical matter Messrs. Deutsch, Farkas and Messina
will be able to elect the Company's entire Board of Directors and to determine
the disposition of all matters submitted to a voting of the Company's
shareholders. See "PRINCIPAL STOCKHOLDERS" and "DESCRIPTION OF SECURITIES".
Limited History of Operations. The Company was formed in March of 1997 for
the express purpose of effecting the Transaction, upon completion of which the
Company will continue the business of Gateway LLC. Gateway LLC was formed as a
Colorado limited liability company in June, 1994. Effective December 31, 1994,
GV Development, LLC, a Colorado limited liability company which was formed in
June, 1993, was merged into Gateway LLC pursuant to the applicable provisions of
the Colorado Limited Liability Company Act. GV Development, LLC's business
activities were similar to Gateway LLC and GV Development, LLC was under the
control of substantially the same members as Gateway LLC. Accordingly, the
activities of GV Development, LLC, are included as those of Gateway LLC for
purposes of this Prospectus and the consolidated financial statements of Gateway
LLC contained herein. During the fiscal years ending December 31, 1995 and 1996,
Gateway LLC experienced net incomes of $9,748 and $109,444 respectively and of
$523,346 for the nine months ended September 30, 1997. While profitable
operations have, accordingly, occurred during the 33 month period ending
September 30, 1997, there can be no assurance that the Company will continue to
operate profitably with respect to the business previously conducted by Gateway
LLC. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS".
10
<PAGE>
Outstanding Debt Obligation and Encumbrance of Assets. From the inception
of Gateway LLC through September 30, 1997, Gateway LLC sold its 12% Secured
Promissory Notes as follows: principal amount of $6 million, due September 30,
1996; principal amount of $3 million due April 30, 1997; and principal amount of
$4 million due September 30, 1999 (the "Notes"). For further information
concerning such Notes, see "MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION ANDRESULTS OF OPERATIONS" and "CERTAIN TRANSACTIONS". As of September
30, 1997, the $6 million Note due September 30, 1996 and the $3 million Note due
April 30, 1997 have been paid in full. The $4 million Note (the "Note") due
September 30, 1999 is outstanding and a principal payment of $500,000 was due
December 31, 1997 and an additional $500,000 will be due at the end of each
calendar quarter thereafter with any unpaid balance due September 30, 1999. The
Company made the December 31, 1997 principal payment of $500,000 from funds from
operations. The Company will pay a total of $750,000 on the principal of the
Note from the proceeds of the offering and the balance will be paid from funds
from operations or debt financing. The obligation represented by the Note is
secured by deeds of trust which encumber a substantial portion of the inventory
of platted, finished and semi-finished residential building lots held by the
Company presently and from time to time. The obligation represented by the Note
has been expressly assumed by the Company. The principal and interest obligation
of the Note is presently unconditionally guaranteed by Messrs. Deutsch, Farkas
and Messina. The Company has agreed to indemnify Messrs. Deutsch, Farkas and
Messina from and against any liability, cost or expense incurred by them under
any loan or obligation obtained by or for the benefit of the Company, including
their guarantees of the Note. The $4 million on the Note was received from
approximately 39 investors including individuals, pension or retirement plans
and trusts in investments ranging from $25,000 to $300,000 with an average
investment of approximately $102,500. Only one of these investors, a family
partnership, with a $100,000 investment, has any affiliation with the Company
which involves the ownership of 5,533 shares of the Company's outstanding Common
Stock. The possibility exists that additional private placements of debt
obligations may be conducted by the Company. In the private placement of the
Note, the Company received assistance from Phillips & Tober, Inc. of Denver,
Colorado, a securities broker-dealer. Phillips & Tober, Inc. has certain rights
of first refusal with respect to any future private offerings of debt
participation obligations of the Company. This first right of refusal does not
apply to loans by financial institutions. The Company has no present plans to
conduct any additional private placement of debt obligations. In addition to the
Note, the Company had other outstanding debt as of September 30, 1997, totaling
$17,120,657 made up of $12,225,169 due to banks, $2,500,219 due to related
parties and to others $2,395,269. Of the total other debt, $15,757,644 is
secured by liens against the real property of the Company under arrangements
providing for the payment of substantial portions of the proceeds received upon
the sale of platted, finished or semi-finished lots. For further information
concerning such debt and the related maturity dates, see Note 3 to the
consolidated financial statements of Gateway LLC included elsewhere in this
Prospectus.
Environmental Risks of Properties Acquired and to be Acquired. With respect
to any real property acquired by the Company, investigatory processes
customarily used in the development industry will have to be accomplished in
order to assure to the extent reasonably practicable that such properties are
not contaminated by any hazardous waste, or, if there is a contamination, that
such contamination can be eliminated or mitigated and does not affect the
building lots. The Company believes, as of the date of this Prospectus, that the
properties constituting its inventory of platted, semi-finished and finished
residential building lots are not contaminated by any hazardous waste. However,
there can be no absolute assurances that hazardous waste that cannot be
effectively removed or mitigated does not or will not in the future be found to
exist under any of the properties owned by the Company or on properties located
close enough to such properties to allow migration of hazardous materials onto
the Company's properties. In such event, the Company may be required to expend
substantial funds to remedy and clean up hazardous waste and the presence of
hazardous waste may adversely affect the ability of the Company to sell or
refinance such properties or to continue to develop such properties. As
indicated subsequently in this Prospectus section and elsewhere herein, a
11
<PAGE>
substantial portion of the Company's inventory of platted, unfinished and
semi-finished residential building lots is subject to a lien securing the
principal and interest obligation of certain outstanding debt obligations of the
Company. See "MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS". In the event that any of such lots are found to be
contaminated by any hazardous waste, the Company will be obligated to replace
such contaminated lots with uncontaminated lots pursuant to the terms of
issuance of such outstanding debt obligations. The Company does not presently
carry insurance against losses caused by hazardous waste or other catastrophe
such as earthquakes or tornadoes.
Geographic Concentration. The residential lot development activities of the
Company and Gateway LLC have been concentrated in the greater Denver
metropolitan area and in Fort Collins, Colorado. See "BUSINESS - Introduction".
The residential lot development and home building market in such areas has
fluctuated greatly during the past approximate ten years. The markets in which
Gateway has operated and in which the Company will operate have experienced
substantial fluctuation in local economic conditions which have been both
adverse and favorable. The market area is also affected by regional and national
economic conditions such as interest and rates of inflation, relative levels of
employment, and local, state and federal governmental policies and regulations.
Presently the Company believes that the markets in which the Company presently
operates are experiencing favorable economic conditions but no assurance can be
given that such circumstance will continue over the near or mid future time.
Regulatory Factors. In its development activities relating to residential
building lots, the Company operates in a strict regulatory environment which
will involve the procurement of necessary zoning classifications, permits and
other authorities permitting the development and further development of real
property acquired. As part of the zoning and subdivision processes, a developer
such as the Company generally is required to agree to complete certain
improvements to the subdivided property, and, in some instances, improvements to
neighboring properties ("off-site improvements") which service the proposed
subdivision, before the lots will qualify for the issuance of a building permit.
Until a lot can qualify for issuance of a building permit, it is not ordinarily
marketable by the Company to a home builder. Compliance with these requirements
may sometimes involve unforeseen delays and costs. See "BUSINESS - Regulatory
Factors".
Additional Capital Needs. The Company estimates that additional development
funds will be required to provide for the total costs of development of the
platted, unfinished and semi-finished lots intended to be acquired and developed
by the Company in the future. The Company anticipates that the required funds
will be provided from the proceeds of the Offering, sales of lots in a finished
state and the creation of additional debt obligations. If the needed funds are
not so available, lots may have to be sold in an unfinished state at
significantly reduced prices. See "BUSINESS - Additional Capital Needs".
Other Operational Risks. In addition to the operational risks enumerated
above, there are other development risks associated with completing the
improvements to the subdivision and lots and making the lots finished and
marketable to the home builder at a price that is profitable to the Company and
within a time frame that will allow the Company and the home builder to take
advantage of cyclical fluctuations in the market. See Market Risks below. Delays
related to governmental regulation, weather, availability of labor and
materials, ability and capacity of utility companies to connect utility service
and supply the volume of service necessary to meet the subdivision needs, and
increases in costs of labor and materials, all can adversely impact the value of
the residential building lots held by the Company.
Market Risks. The market for residential real estate is cyclical. A strong
or rising new home sales market creates demand for lot development. Often, in an
attempt to reach this market first, developers initiate new projects all at once
creating an oversupply of available lots when the lots are finished months later
after completion of the development process. Whether the demand for new lots
will keep pace with the competitive effort to supply lots is dependent on many
factors beyond the control of the Company. Consequently, there is a risk that
the Company may purchase property that it subsequently is unable to sell at a
profit or at all as a result of adverse conditions which develop in the market.
Also, in the normal course of business, it will be necessary for the Company to
expend funds to investigate and evaluate potential properties to be acquired by
the Company, to pay option deposits to secure purchase contracts for properties,
and to expend funds to obtain plats for properties (the costs of the platting
process can range from $50,000 to $500,000 per property), even though the
Company ultimately may not actually acquire the properties due to a downturn in
the market. See "BUSINESS - The Residential Home Building Industry".
12
<PAGE>
Future Operations Dependent Upon Property Availability. As of the date of
this Prospectus, the Company has only two property locations under contract and
identified for future acquisition. The Company's future operations will be
dependent upon its ability to locate, identify and acquire additional properties
for development, of which there is no assurance. See "BUSINESS - Property
Acquisition by the Company".
Dependence on PrideMark and Other Home Builder Customers. For the 33 month
period beginning January 1, 1995, 68% of the finished and semi-finished lots
sold by the Company have been sold to PrideMark, a home building company owned
by Michael A. Messina, who is an officer, director and principal stockholder of
the Company. It is anticipated that the Company will continue to sell between
one-third to one-half of its platted, finished and semi-finished lots to
PrideMark. The Company currently has eight other existing home builder
customers. As a consequence, the Company's success is heavily dependent upon the
economic health of PrideMark and its other customers and a bankruptcy or other
reorganization of any of these customers could have a material adverse effect
upon the Company's business. Even some of the largest production home builders
operating in the Denver metropolitan area have experienced reorganization
proceedings under the bankruptcy laws during the past approximate ten years.
Dependence on Key Personnel. Messrs. Harvey E. Deutsch, Joel H. Farkas and
Michael A. Messina presently serve as members of the Board of Directors of the
Company and as the executive officers of the Company. The ability of the Company
to successfully conduct its business is largely dependent upon the continuing
availability of such persons in their managerial capacities. Loss of the
services of Messrs. Deutsch, Farkas or Messina could have a material adverse
affect on the Company's ability to achieve its business objectives. The Company
and each of these three officers have entered into an employment agreement with
an initial term through December 31, 2000. The Company has obtained key-person
life insurance upon these three individuals in the amount of $1,500,000 each.
See "MANAGEMENT".
Property Purchases from Management and Continuing Conflicts of Interest. In
the past over 50% of the real property purchased by Gateway LLC has been from
entities in which Messrs. Deutsch, Farkas and Messina have had an interest.
These 12 transactions have involved an aggregate purchase price of $8,965,165
from properties in which the sellers aggregate cost was $4,803,380, with a
resultant gross aggregate profit to the sellers of $4,161,785. Of this profit
amount, an aggregate of approximately $3,011,501 inured to the benefit of
Messrs. Deutsch, Farkas and Messina. In addition, Gateway LLC purchased all of
the membership interests, at a price equal to the aggregate capital accounts of
the members, of Sterling Hills, Ltd. Of the total purchase price, an aggregate
of $265,664 inured to the benefit of Messrs. Deutsch, Farkas and Messina. See
"CERTAIN TRANSACTIONS - Certain Purchase/Sale Transactions - Property Purchases
from Affiliates", and Footnote 5 to the table therein. Although neither of these
Company officers or any other affiliate have any interest in any property the
Company has presently identified for future purchase, it is possible that future
property purchases from sellers in which management or other affiliates own an
interest may occur. For details as to the previous purchase transactions
involving affiliates, the procedures followed in determining property purchase
prices and the policies set up to be followed in property purchases from
affiliated parties. See "CERTAIN TRANSACTIONS - Certain Purchase/Sale
Transactions", "BUSINESS - Property Acquisition by the Company", and "BUSINESS -
Conflicts of Interests".
Benefits to Management from Use of Proceeds and Management's Discretion in
Allocation of Proceeds. The Company's use of proceeds of the offering will
result in substantial direct and indirect benefits to Messrs. Deutsch, Farkas,
Messina, and Sheldon as follows: (i) $573,000 will be paid to them for accrued
salaries; (ii) $870,000 will be paid to them for debt; (iii) $125,000 will be
paid on debt which will inure to their benefit; and (iv) the $750,000 to be paid
on the 12% Secured Note will benefit them, since they have unconditionally
guaranteed the Note. See "USE OF PROCEEDS" and "MANAGEMENT". The Company's Board
of Directors has and will exercise broad discretion in the allocation of the use
of offering proceeds.
13
<PAGE>
Company Offices Leased from Affiliate. The Company's offices and
administrative headquarters are located in facilities leased from 9145 E. Kenyon
LLC in which Harvey E. Deutsch and Norman A. Sheldon directors of the Company
are managers and members. See "CERTAIN TRANSACTIONS - Company Headquarters and
Providing of Legal Services".
Legal Services Provided by Affiliate. The law firm of Deutsch, Spillane &
Reutzel, P.C., in which Mr. Deutsch is a member, has and will continue to
provide legal services to the Company. See "CERTAIN TRANSACTIONS - Providing of
Certain Legal Services".
Majority of Lots Sold to Affiliated Party. The Company has historically
sold a substantial portion of its platted, semi-finished or finished lots to
PrideMark, a home construction firm owned by Michael A. Messina, who is also an
officer, principal shareholder, and a member of the Board of Directors of the
Company. From commencement of operations through September 30, 1997, the lot
sales to PrideMark constituted approximately 68% of total sales. It is
anticipated that the Company will continue to sell a portion of lots to
PrideMark in the future. Commencing in 1992, PrideMark began developing,
platting and acquiring lots to serve its own building needs. The future
operations of the Company will be dependent, in a large degree upon its ability
to develop and expand lot sales to parties other than PrideMark. In addition,
the Company has and will make lot sales to Strauss Homes, LLC, a firm in which
Jeffrey K. Prager, a key employee of the Company is a principal owner. See
"CERTAIN TRANSACTIONS", "MANAGEMENT" and "PRINCIPAL STOCKHOLDERS".
Competition. The residential lot development industry is highly
competitive. In times of strong demand for residential building lots, developers
are inclined to initiate a number of developments at substantially the same time
thereby potentially creating an oversupply of residential building lots in a
particular area. When demand for such residential building lots slackens,
downward pressure with respect to the pricing of such residential lots usually
occurs. Other factors will affect the relative competitive position of the
Company, including the location of the Company's platted, semi-finished and
finished lots, the presence of other competing entities in the Company's areas
of operations and the relative level of acceptance of the lots platted, finished
or semi-finished by the Company from an aesthetic point of view by the consumer.
Ultimate pricing of the lots will also be a competitive factor. Entities in
competition with the activities of the Company may be vested with substantially
greater financial, managerial and other resources than those available to the
Company at the conclusion of this offering. Since PrideMark commenced
developing, platting and acquiring lots for its own building needs in 1992 (See
"Majority of Lots Sold to Affiliated Party" above), to the extent PrideMark
conducts and expands these operations it competes with the Company from the
standpoint of the Company's ability to acquire suitable properties for
development. There can be no assurance that the Company will effectively meet
competition on a continuing basis. See "BUSINESS - Competition" and "CERTAIN
TRANSACTIONS - Competing Development Activities".
Uncertainties in and Speculative Status of Possible Participation in
Stapleton Airport Redevelopment. The Company is a member of a group of investors
and real estate developers that has made an unsolicited offer to purchase the
former Stapleton International Airport site in Denver, Colorado. Presently the
property is owned by the City and County of Denver ("City") and managed by a
non-profit entity (the "Stapleton Development Corporation"). The City has not
yet made a determination whether it wishes to privatize the redevelopment. If
the City does determine to privatize the redevelopment, it would determine
whether the sale would be (a) for all or portions of the property; and (b)
negotiated or based upon an open bid procedure. The Company does not yet know
(a) if the redevelopment of the property or any portion thereof would be
privatized; (b) the location or quantity of acreage that would be sold; (c) the
permitted land uses for such acreage; (d) the price; (e) the costs of
infrastructure installation; and (e) associated demolition costs or the other
costs of development of any portion of the property or the impact on the Company
in the event of a purchase. There is no assurance that, even in the event the
City decides to sell any or all of the property, the investment group of which
the Company is a member would be successful in any purchase efforts. See
"BUSINESS" - Other Activities.
Determination of Share and Warrant Offering Price. Prior to the offering
made hereby, there has been no public market for the Common Stock or Warrants of
the Company and there is no assurance that an active trading market for such
Common Stock and Warrants will develop or be sustained after the offering is
concluded or that the shares of Common Stock or the Warrants will be traded at
or above their initial public offering prices of $4.00 and $.1875, respectively.
14
<PAGE>
The initial public offering prices of the Common Stock and the Warrants were
determined through negotiations between the Company and the Representative based
upon the factors described herein and may not be indicative of the market prices
for the Common Stock or the Warrants subsequent to the conclusion of the
offering. In the determination of the offering prices, the Representative and
the Company made subjective evaluations of the Company's assets, management,
historical and future earnings, the present and projected economic conditions of
the area in which the Company operates and the status of the nation's securities
markets. See "UNDERWRITING".
Necessity to Maintain Nasdaq Listing. At the conclusion of the public sale
of the Common Stock and Warrants offered hereby, it is anticipated that such
Common Stock and Warrants will be eligible for listing on the Nasdaq SmallCap
Market. In order to continue to be listed on Nasdaq SmallCap, however, the
Company must maintain, among other criteria, $2 million in net tangible assets
or $35 million in market capitalization or $500,000 in net income (in the latest
fiscal year or in two of the last three fiscal years). In addition, the ability
to have such Common Stock and Warrants listed on a continual basis requires the
presence of two market makers and a minimum bid price of $1.00 per share. The
failure to satisfy these criteria on a continuous basis may result in the
delisting of the Common Stock of the Company from Nasdaq SmallCap, in which
event trading, if any, in the Common Stock would thereafter be conducted on the
OTC Bulletin Board or in the over-the-counter market. As a result of any such
delisting, investors may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Common Stock and Warrants.
Risks Relating to Low Priced Stocks. In the event that the Common Stock of
the Company were to be delisted from trading on Nasdaq SmallCap and no other
exclusion from the definition of "penny stock" under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") were available, trading in the Common
Stock of the Company would also be subject to the requirements of certain rules
promulgated under the Exchange Act by the Commission, which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock. Such rules require delivery, prior to any penny stock
transaction, of a disclosure document explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell or deal in penny stocks to persons who are other than
established customers of such broker-dealers or Accredited Investors. For these
types of transactions, the broker-dealer must make special suitability
determinations with respect to the purchaser and have received the purchaser's
written consent to the transactions prior to sale. The additional burdens
imposed upon broker-dealers by such requirements relating to penny stocks could,
most likely, discourage broker-dealers from effecting transactions in the Common
Stock and Warrants of the Company, which would severely limit and restrict the
market liquidity attributable to the Common Stock and the Warrants and the
ability of purchasers in this offering to sell the Common Stock and Warrants in
any secondary market.
Market for Common Stock and Warrants. In connection with this offering of
Common Stock and Warrants, the Underwriters may engage in stabilization
activities. The effect of such activities may result in the bid price for the
Common Stock and Warrants of the Company to be artificially maintained at a
level higher than if such activities are not undertaken. See "UNDERWRITING".
Additionally, the Underwriters are expected to sell the Common Stock and
Warrants to the their customers and to engage in market making activities with
respect to the after market for the Common Stock and the Warrants. No assurance
can be given that such market making activities of the Underwriters will
continue for any length of time and the withdrawal of one or more of the
Underwriters as market makers for the Company's Common Stock and Warrants could
have an adverse effect on the price of such securities and the after market for
such securities.
Shares Eligible for Future Sale. As of the Effective Date and prior to the
completion of this public offering there will be outstanding 2,352,000 shares of
Common Stock of the Company and Founders Warrants to purchase 300,000 shares of
Common Stock exercisable at $4.50 per share up to five years from the date of
this Prospectus. Of such shares and Founders Warrants, 327,000 shares of Common
Stock and all the shares underlying the Founders Warrants to purchase 300,000
shares have been registered under the Act simultaneous with this offering of
Common Stock and Warrants. Of such 327,000 shares of Common Stock, 27,000 shares
may not be sold for a period of 90 days from the Effective Date. The balance of
15
<PAGE>
300,000 shares of the Common Stock and the Founders Warrants to purchase 300,000
Shares are subject to "lock-up provisions" which preclude the ability of the
holders of such securities from selling into the market without the prior
consent of the Representative for the 15 month period subsequent to the
Effective Date. The remaining 2,025,000 shares of Common Stock of the Company
presently outstanding constitute Restricted Securities, as that term is defined
in Rule 144 promulgated under the Act. These Restricted Securities will be
eligible for public sale pursuant to Rule 144 at such time as such shares have
been held for a period of one year from the time of acquisition thereof.
Accordingly, the Restricted Securities may become eligible for future sale
during 1998; but they are also subject to the "lock-up provisions" for the 15
months from the Effective Date. The holder of Restricted Securities may effect
sales under Rule 144 if such holder complies with certain notice provisions with
respect to any such sale transactions and complies with certain volume
restrictions. The sale of substantial amounts of these securities in the public
market could adversely effect market prices of the securities, making it more
difficult, for the Company to sell equity securities in the future at a time and
price which it deems appropriate. See "DESCRIPTION OF SECURITIES".
Possible Adverse Effects of Redemption of Warrants. The Warrants offered
hereby may be redeemed by the Company at any time upon notice of not less than
30 days at a price of $.35 per Warrant, provided the closing bid quotation of
the Common Stock of the Company on 30 consecutive trading days has been at least
$6.40 and provided that such notice is mailed within ten days after the end of
such period in which such price exists. Prior to the first anniversary of the
Effective Date, the Purchase Warrants will not be redeemable by the Company
without the written consent of the Representative. Such redemption provisions
and the utilization thereof by the Company could compel the holders of the
Warrants to exercise the Warrants and pay the exercise price of $4.50 per share
issuable at a time when it may be disadvantageous for them to do so; to sell the
Warrants at the then current market price for the Warrants then prevailing in
the market therefor, if any, when they might otherwise wish to hold the
Warrants; or to accept the redemption price of $.35 per Warrant, which may be
substantially less than the market value of the Warrants at the time of any such
redemption. See "DESCRIPTION OF SECURITIES - Warrants".
Possible Lack of Value of Warrants; Possible Inability to Exercise
Warrants. The Warrants are exercisable at $4.50 per share of Common Stock and
expire five years from the date of this Prospectus. Should the market price for
the Common Stock not materially exceed $4.50 prior to that date or should the
Company be sold, merged, or otherwise reorganized in the transaction in which
its stockholders consideration at less than $4.50 per Share, the Warrants will
have no value. With respect to the public offering thereof, the Company intends
to qualify the sale of the Common Stock and Warrants described in this
Prospectus in a specified number of states. Although exemptions in the
securities laws of certain states may permit Warrants to be transferred to
purchasers in states other than those in which the Warrants were initially
qualified, the Company will be prevented from issuing Common Stock in such other
states upon the exercise of the Warrants unless an exemption from the
qualification requirements of such state or states is available or unless the
issuance of Common Stock upon exercise of the Warrants is qualified. Although
the Company will endeavor to qualify the Common Stock underlying the Warrants
for sale in a state where qualification is required and may be reasonably
obtained, there is no assurance that the Common Stock will be qualified for sale
in all of the states in which the ultimate purchase of Warrants reside. In such
event, the Warrants will expire and will have no value if they cannot be sold.
Accordingly, the market for the Warrants may be limited because of these
restrictions. Further, a current Registration Statement covering the Common
Stock issuable upon the exercise of the Warrants must be in effect before the
Company may permit the exercise of Warrants. For various reasons, no assurance
can be given that the Company will be in a position to file and process to
effectiveness a Registration Statement covering the Common Stock issuable upon
exercise of the Warrants. See "DESCRIPTION OF SECURITIES - Warrants".
16
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Representative Warrants. Pursuant to the Underwriting Agreement existing
between the Company and the Representative, the Representative will be issued
150,000 Common Stock Representative Warrants and 300,000 Warrant Representative
Warrants for which the Representative will pay a nominal consideration. The
300,000 Warrant Representative Warrants provide, upon full exercise and for the
payment of a purchase price of $.28125 per warrant, for the issuance of 300,000
Underlying Warrants. The Common Stock Representative Warrants and the Underlying
Warrants shall each be exercisable into one share of the Company's Common Stock
at an exercise price of $6.00 per share during the five year period commencing
on the Effective Date. With respect to the Representative's Warrants, the
Company will grant to the Representa tive certain registration rights which
could result in substantial expense to the Company and may be a hindrance to the
Company's ability to obtain future financing when needed. In the event that the
Representa tive's Warrants are exercised, sales of shares of the Common Stock
underlying the Representative's Warrants could have a depressive effect on the
market price of the Common Stock in the event that a public market develops. See
"UNDERWRITING".
Continuing Influence of Representative Upon the Company. Pursuant to the
underwriting terms the Representative may have the ability to exert continuing
influence upon the Company by reason of: (i) issuance of the 150,000 Common
Stock Representative Warrants and Warrant Representative Warrants; (ii) the
Financial Advisory Agreement to act as the Company's investment banker for the
12 months from the Effective Date for a fee of $108,000 payable at the closing
of the offering; (iii) the agreement of the Company to pay a specified fee to
the Representative if the Company enters into a covered business combination
arrangement with any party introduced by the Representative during the five
years from the Effective Date; and (iv) the right of the Representative to have
an observer attend the meetings of the Company's Board of Directors during the
three years from the Effective Date. See "UNDERWRITING".
Additional Warrants/Stock Options. In addition to the Warrants offered by
this Prospectus and the Representative's Warrants to be granted to the
Representative, there will be outstanding Founders Warrants for the purchase of
up to 300,000 shares of Common Stock. The exercise price with respect to
Founders Warrants is $4.50 per Share and the Warrant exercise period concludes
five years from the Effective Date. The shares of Common Stock issuable upon
exercise of the 300,000 Founders Warrants have been registered contemporaneous
to the registration of the Common Stock and Warrants being offered hereby but,
to the extent that such Warrants are exercised during the 15 month "lock-up"
period relating to the restriction on the transfer of certain outstanding Common
Stock of the Company, such restrictions on transfer shall be applicable to such
Common Stock. The Company has also reserved 375,000 shares of Common Stock for
issuance in connection with a Stock Option Plan which it anticipates will be
adopted subsequent to the conclusion of the sale of the Common Stock and
Warrants offered hereby. With respect to such Founders' Warrants and any holders
of stock options subsequently granted, the holders of such Warrants and options
may be afforded at a relatively nominal cost, the opportunity to profit from a
rise in the market price of the Common Stock of the Company. Additionally, while
such Founders' Warrants and options are outstanding, the terms pursuant to which
the Company may obtain additional required capital may be adversely affected
since the holders of such Warrants and options may be expected to exercise such
Warrants and options at a time when the Company could obtain needed capital by
an offering of securities on terms more favorable than those provided by such
Warrants or options. See "PRINCIPAL STOCKHOLDERS".
No Foreseeable Dividends. The Company does not anticipate paying dividends
with respect to its outstanding Common Stock in the foreseeable future time. See
"DIVIDENDS".
17
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SELECTED FINANCIAL INFORMATION
------------------------------
The following selected financial data for the years ended December 31, 1995 and
1996 for Gateway LLC, the two years ended December 31, 1995 and 1996 for the
Company (including its predecessors, Gateway American Properties Corporation, a
Florida corporation and Apollo III, Inc., for the period from January 12, 1995
(date of inception) through September 30, 1997 are derived from the financial
statements of each respective company. The financial data for the nine month
periods ended September 30, 1997 and 1996 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals for each company considered necessary
for a fair presentation of the financial position and results of operations for
these periods. Operating results for the nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1997. The data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information included herein.
The pro forma selected financial data as of September 30, 1997 and for the
year ended December 31, 1996 and the nine months ended September 30, 1997 are
derived from the unaudited pro forma condensed balance sheet and statements of
operations set forth subsequently in this Prospectus, which give effect to the
Transaction in the manner described in the notes to the pro forma condensed
financial statements. The pro forma selected financial data presented below and
the pro forma condensed financial statements should be read in conjunction with
the accompanying notes to the pro forma condensed financial statements, the
historical financial statements and the notes of each of the respective
companies, all of which are included subsequently in this Prospectus. The
unaudited pro forma condensed statements of operations are not necessarily
indicative of future operations or the actual results that would have occurred
had the Transaction been consummated at the beginning of each period presented.
Gateway American Properties, LLC
(a Colorado limited liability company)
Consolidated
Year Ended Nine month period
December 31, Ended September 30,
----------- -------------------
1995 1996 1996 1997
------ ------ ------ ------
Statement of Operations
Data:
Sales $4,375,359 $10,500,606 $6,836,345 $6,746,545
Gross Profit(1) 628,074 951,526 758,598 1,393,114
Operating Income 38,169 160,004 224,196 602,038
Net Income 9,748 109,444 171,417 523,346
December 31, September 30,
1996 1997
----------- ------------
Balance Sheet Data:
Total Assets(2) $18,936,406 $24,201,053
Debt(2) 18,375,162 23,243,506
Members' Equity 404,298 846,144
18
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Gateway American Properties, Corp.
(A Florida Corp.)
Year Ended Nine month period
December 31, Ended September 30,
------------ ------------------
1995 1996 1996 1997
------ ------ ------ ------
Statement of Operations Data:
Sales $ -0- $-0- $ -0- $ -0-
Gross Profit -0- -0- -0- -0-
Operating Loss (173,966) (464,846) (44,965) (16,970)
Net Loss (173,996) (464,846) (44,965) (16,970)
December 31, September 30,
----------- ------------
1996 1997
------ ------
Balance Sheet Data:
Total Assets $51,854 $59,852
Debt 35,798 60,766
Stockholders' Equity (Deficit) 16,056 (914)
Gateway American Properties, Corp.
(A Colorado Corp.)
Inception
Through
September 30, 1997
------------------
Statement of Operations Data:
Sales $ -0-
Gross Profit -0-
Operating Income (Loss) -0-
Net Income (Loss) -0-
September 30,
1997
======
Balance Sheet Data:
Total Assets $ 100
Debt -0-
Stockholders' Equity $ 100
19
<PAGE>
Unaudited Pro Forma Selected Financial Data
Giving Effect to the Transaction
Year Ended Nine months
December 31, Ended September 30,
1996 1997
------ ------
Income Statement Data:
Sales $10,500,606 $6,746,545
Gross Profit(1) 951,526 1,393,114
Operating Income (Loss) (306,730) 584,973
Net Income (Loss) (386,802) 303,876
Net Income (Loss) per Common Share(2) (.10) .13
As adjusted for
September 30, 1997 Offering
------------------ --------
Balance Sheet Data:
Total Assets(3) $24,261,005 $27,147,255
Debt(3) 23,304,272 20,704,272
Stockholders' Equity 845,330 6,331,580
- ------------
(1) Gross profit is defined as total sales less cost of sales.
(2) Net income per common share reflects the 1,500,000 Shares that will be
outstanding after the consummation of the Transaction and the offering
described in this Prospectus which will occur in conjunction with and as a
part of the Transaction. These income calculations do not give any effect
to the proceeds that will be received pursuant to the offering described in
this Prospectus.
(3) Consistent with industry standards, assets and liabilities are not
classified as either current or long term and, therefore, information
relating to such classifications is not presented.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In General
The Company, on and after the Effective Date, will continue the business
operations of Gateway LLC, directly or through Gateway LLC. Gateway LLC is a
Colorado limited liability company formed in June, 1994. In December, 1994, GV
Development, LLC, a Colorado limited liability company formed in June, 1993, was
merged into Gateway LLC. The business of GV Development, LLC, was similar to the
business of Gateway LLC and was under control of substantially the same members.
Consequently, GV Development, LLC, is treated as a predecessor of Gateway LLC
and all references to Gateway LLC in this Prospectus and the financial
statements included herein include the activities of GV Development, LLC.
Gateway LLC acquires suitable real estate properties for development as platted,
semi-finished or finished residential building lots intended primarily for sale
to home builders who intend to construct on such lots single or multi family
residential structures for sale to the ultimate occupant. Gateway LLC also
engages in home construction and related marketing activities. See "SUMMARY" and
"BUSINESS".
The Company's and Gateway LLC's income has been previously derived from the
sale of platted, semi-finished or finished lots to home builders at lot prices
usually determined at the time that the Company commences development of the
lots. The Company's and Gateway LLC's profits have been derived as a result of
the difference between the gross selling price of the lots sold to various home
builders and the cost of such lot acquisition and the development activities
undertaken by Gateway LLC. It is anticipated that the Company's income will
continue to be substantially derived from the sale of lots as described above.
Income may also be derived from other business, including the home building
business. The entire process relating to Gateway LLC's development activities is
largely driven by the ultimate price of the home to the dwelling occupant. The
ultimate price of the lot is substantially controlled by such factors as market
demand, location, dwelling size and quality, type and extent of common
development amenities and aesthetic considerations. Factors which affect the
home building industry in a more general way, such as the level of long and
short term interest rates, relative availability of development and long term
financing, local and national economic conditions and competition, will also
reflect the amount of the ultimate price of the residential building lot to the
dwelling occupant.
In the light of such environment, Gateway LLC undertakes analysis with
respect to any real estate property being considered for acquisition and/or
development. Considerations and factors utilized in such analysis include the
formulation of development cost budgets with respect to required on site and off
site development, estimates of the cost and time required to accomplish required
regulatory matters (zoning, permitting, etc.), the level of interest on the part
of home builders to whom the Company has sold lots in the past and the
determination of the ultimate home price to the home buyer which in most cases
is provided as a result of an independent appraisal of the property in its
undeveloped state and of the projected value of the lots to be developed on the
property, assuming the completion of development activities.
Gateway LLC's residential lot acquisition and development activities have
been concentrated in the greater Denver, Colorado metropolitan area and in Fort
Collins, Colorado. Such concentration is expected to continue during the near
future time. It is the Company's intention to provide lots to builders who will
build homes selling in the $100,000 to $200,000 price range. This price range
represents a significant share of the metro Denver and Ft. Collins markets. See
"BUSINESS - The Residential Home Building Industry".
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<PAGE>
Historically, a substantial amount of Gateway LLC's lot sales have been
made to PrideMark Homes ("PrideMark"), an affiliate of the Company (PrideMark is
owned by Michael A. Messina, an officer, director and principal shareholder of
the Company). During the period from January 1, 1995 through September 30, 1997
68% of the finished and semi-finished lots sold by the Company were sold to
PrideMark. The Company has implemented and is continuing a plan to expand its
customer base. The number of home builders under contract to purchase lots from
the Company has increased from four at January 1, 1996 (including PrideMark) to
eight as of the date of this Prospectus; namely, Melody Homes, US Home
Corporation, PrideMark Homes, Continental Homes, Meadow Homes, Inc., Strauss
Homes, Sundown Development, Inc., and Odyssey Homes.
As of September 30, 1997, the Company had contracts for builders to
purchase lots in excess of $12,000,000 market value. Since September 30, 1997 to
the date hereof, the Company executed additional contracts with builders which
bring the Company's total market value of outstanding contracts to in excess of
$15,250,000. These contracts call for lot delivery from 1997 through the year
2000. These contracts are subject to the Company's ability to deliver the lots
and the financial ability of the various purchasers to purchase them. Of the
outstanding lot sale contracts as of the date of the Prospectus, the contracts
with PrideMark involve approximately 20%.
Results of Operations
The results of operations of Gateway LLC for the year ended December 31,
1995 compared to the year ended December 31, 1996 and for the nine month period
ended September 30, 1996 compared to the nine month period ended September 30,
1997.
Gateway LLC (including its predecessor, GV Development, LLC) commenced
operations on June 24, 1993.
For the year ended December 31, 1995, Gateway LLC experienced sales of
$4,375,359, of which, $2,800,535 were to related parties. See "CERTAIN
TRANSACTIONS". Cost of sales were $3,747,285 and general and administrative
expenses were $589,905, resulting in an operating income of $38,169.
For the year ended December 31, 1996, Gateway LLC experienced sales of
$10,500,606, of which, $7,901,928 were to related parties. See "CERTAIN
TRANSACTIONS". Cost of sales were $9,549,080 and general and administrative
expenses were $791,522, resulting in an operating income of $160,004.
Sales for 1996 represent an increase of 139% over sales for 1995, as
Gateway LLC opened new subdivisions. Additionally, the maturation of existing
subdivisions contributed to Gateway LLC's sales increases. Cost of sales in 1996
were approximately 91% of sales, compared to approximately 86% in 1995 primarily
as a result of additional start-up and infrastructure costs for Gateway LLC's
subdivisions and amortization of financing costs related to Gateway LLC's
private placements. General and administrative expenses increased by $201,617
from 1995 to 1996 representing primarily increases in staffing for Gateway LLC's
expansion and amortization of loan fees related to Gateway LLC's private
placement. However, as a percentage of sales, general and administrative
expenses decreased from 13.5% of sales in 1995 to 7.5% in 1996, reflecting many
costs which do not increase in relationship to sales, including, salaries, rent,
employee benefits and other fixed costs.
22
<PAGE>
For the nine month period ended September 30, 1996, Gateway LLC experienced
lot sales of $6,836,345 of which $4,531,383 were to related parties. See
"CERTAIN TRANSACTIONS". The costs of such lot sales for the nine month period
ended September 30, 1996, were $6,077,747 which, when taken with general and
administrative expenses of $534,402, resulted in an operating net income of
$224,196.
For the nine month period ended September 30, 1997, Gateway LLC experienced
lot sales of $6,746,545 of which $4,485,601 were to related parties. See
"CERTAIN TRANSACTIONS". The costs of such lot sales for the nine month period
ended September 30, 1997, was $5,353,431, which, when taken with general and
administrative expenses of $791,076, resulted in an operating and net income of
$602,038.
Sales for the first nine months of 1997 decreased by approximately 1%.
Development activity during the period ended in 1997 was greater than in 1996,
as evidenced by the increase in land under development of approximately
$21,544,000 in 1997 compared to approximately $14,735,000 in 1996. Lot
completion is running slightly behind 1996, however management anticipates that
closings will occur during the last three months of 1997, which will result in
sales for 1997 to be approximately the same as compared to 1996.
Cost of sales for the nine months ended September 30, 1997 decreased by
approximately $724,000 as compared to the nine months ended September 30, 1996,
or from 88% of sales in 1996 to 79% of sales in 1997. The primary reasons for
the decrease are certain bulk sale transactions of partially developed land.
General and administrative expenses increased by $256,674 during the nine months
ended September 30, 1997, as compared to 1996, primarily as a result of
increases in car allowances of $82,000 and wages of $96,000 due to management,
legal and professional fees of $43,000 and other office expenses of
approximately $36,000.
The results of operations of Gateway American Properties Corporation, a Colorado
Corporation, which consists of its predecessors Gateway American-Florida, and
Apollo III, Inc. but not Gateway LLC, a Colorado limited liability Company, for
the year ended December 31, 1995 compared to the year ended December 31, 1996
and for the nine month period ended September 30, 1996 compared to the nine
month period ended September 30, 1997.
For the years ended December 31, 1995 and 1996, respectively, the Company
experienced an operating loss of $185,472 and $466,734 and had interest income
of $11,476 and $1,888 respectively. It experienced a net loss of $173,996 for
the year ended December 31, 1995 and a net loss of $464,846 for the year ended
December 31, 1996. The Company sustained an operating loss of $46,456 and
$17,065 for the nine month periods ended September 30, 1996 and 1997 and had
interest income of $1,491 and $95, resulting in a net loss of $44,965 and
$16,970 for the nine months. The Company and its named predecessors were a
development stage company. Their consolidated losses arose primarily because of
start-up or pre-acquisition activities.
Liquidity and Capital Resources
Gateway LLC financed its lot acquisition and development activities through
the proceeds derived from the capital contributions made by the members of
Gateway LLC, through the net proceeds realized from the sale of platted,
semi-finished and finished lots, and through the net proceeds realized by
Gateway LLC as a result of the private and limited offer and sale of certain
debt securities. The continuing operations of the Company and Gateway LLC will
be financed through a portion of the net proceeds of the offering made hereby,
See "USE OF PROCEEDS" through the proceeds from the sale of lots, through bank
loans and possibly through the private sale of debt securities.
At September 30, 1997, the holders of the outstanding membership interests
of Gateway LLC had contributed (net of distributions) cash and property to
Gateway LLC in the amount of $136,448.
23
<PAGE>
From Gateway LLC's inception through the period ended September 30, 1997
Gateway LLC sold its 12% Secured Promissory Notes as follows: principal amount
of $6 million, due September 30, 1996, principal amount of $3 million due April
30, 1997; and principal amount of $4 million due September 30, 1999 (the
"Notes"). For further information concerning such Notes, see "CERTAIN
TRANSACTIONS". As of September 30, 1997, the $6 million Note due September 30,
1996 and the $3 million Note due April 30, 1997 have been paid in full. The Note
due September 30, 1999 ("Note") is outstanding and a principal payment of
$500,000 was due December 31, 1997 and an additional $500,000 will be due at the
end of each calendar quarter thereafter with any unpaid balance due September
30, 1999. The December 31, 1997 payment was timely made. The Company will pay a
total of $750,000 on the principal of the Note from the proceeds of the offering
and the balance will be paid from funds from operations or debt financing. On
the Effective Date, the Company will unconditionally assume the obligation of
Gateway LLC with respect to the Note. The principal obligation of the Note is
unconditionally guaranteed by Harvey E. Deutsch, Joel H. Farkas and Michael A.
Messina. See "MANAGEMENT". The Company has agreed to indemnify Messrs. Deutsch,
Farkas and Messina from and against any liability, cost or expense incurred by
them under any loan or obligation obtained by or for the benefit of the Company,
including their guarantees of the Note.
The Note was issued under the authority of and is subject to the provisions
and terms of a loan agreement existing between Gateway LLC, Phillips & Tober,
Inc., the placement agent for the Note, and MegaBank of Arapahoe (the "Agent"),
a deposit institution maintaining its offices in Denver, Colorado. MegaBank of
Arapahoe acts as agent with respect to the Note and acts in the collective
benefit of the holders of the Note. The Note was privately offered and sold by
Gateway LLC through the facilities of Phillips & Tober, Inc., as placement
agent, to suitable and "Accredited Investors" (as defined under the Securities
Act of 1933) on the basis of $100,000 units of participation in the Note.
Interest of approximately $40,000 is paid monthly at the rate of 12% on the
Note. The Agent is required to undertake certain notice and corrective action in
the event that default occurs with respect to the payment of any interest or
principal payment when due.
The obligation represented by the Note is secured by deeds of trust
(mortgages) encumbering various real estate parcels and projects with which
Gateway LLC is involved. The deeds of trust have a first priority status,
subject only to certain exceptions as are set forth in the governing loan
agreement, which exceptions include development agreements which may be entered
into between Gateway LLC and certain cities and counties where the encumbered
projects are located, and other existing matters of record. The Agent, as
nominee and agent for the Note and the holders of the units of participation
therein, is the beneficiary of such deeds of trust.
The properties to which the deeds of trust relate are comprised of platted,
semi-finished lots or lots in the process of being platted. In order for lots to
become finished lots, Gateway LLC is obligated to accomplish certain development
activities, including providing access to all utilities with a capacity to
service the lots in question, providing ingress and egress to and from public
roads and otherwise making the lots fully qualified for the issuance of building
permits for the construction of a residential dwelling on a lot or lots. Upon
the completion of these activities, the lots are available for sale to
purchasers.
Gateway LLC must also meet certain obligations in order for the Agent to
disburse Note proceeds for the acquisition of any particular parcel which
Gateway LLC intends to acquire and develop into platted, finished or
semi-finished lots. Unless waived by the agent, such requirements include the
requirement that (a) the parcel be zoned and platted, (b) there is a mortgagee
title insurance policy in the amount of the appraised value of the parcel and
insuring the priority of the lien of the deeds of trust which is available and
is being delivered, (c) there is evidence of ingress and egress via finished
public roads and (d) there is available capacity for service from and access to
all necessary and required utilities.
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<PAGE>
As of the Effective Date, Gateway LLC is in full compliance with the
requirements of the loan agreement and the Company and Gateway LLC believes that
compliance will continue.
Gateway LLC has also historically utilized bank lines of credit and
financing proceeds made available by certain affiliates. At September 30, 1997,
Gateway LLC had aggregate outstanding debt of approximately $17.1 million in
addition to the $4 million on the Note described above. Such additional loans
have various interest rates, terms and maturities. See Note 3 to the
consolidated financial statements of Gateway LLC included elsewhere in this
Prospectus. The only presently open line of credit of Gateway LLC is with a
non-affiliated bank in the amount of $100,000.
The Company believes that the funds made available from the sources
described above and those anticipated to be received by the Company as a result
of the conclusion of the offering of Common Stock and Warrants made hereby,
together with anticipated cash flows to be derived from the sale of platted,
semi-finished or finished lots, will be sufficient to meet Gateway LLC's and the
Company's liquidity requirements during the 12 months following the date of this
Prospectus. To the extent that such sources of funds are insufficient, Gateway
LLC and the Company will be required to seek additional sources of funds and
there can be no assurance that Gateway LLC and the Company will be able to
procure additional funds on acceptable terms or will be able to procure
additional funds at all.
The acquisition and lot development activities of Gateway LLC and the
Company are affected to a certain degree by weather conditions, availability of
necessary materials and labor, and other factors which can fluctuate on a
seasonal basis. Generally, the lot development activities must be conducted
under favorable weather conditions and adverse weather conditions can interrupt
or cause a temporary cessation in such activities. Delays, when encountered, may
diminish or eliminate the anticipated profit margin with respect to any lot
project then being conducted.
Gateway LLC and the Company may experience fluctuations in future
operations as a result of a number of factors, including local and general
economic conditions, the cyclical nature of the real estate market, the economic
health of the Company's home builder customers, the relative availability of
suitable real estate parcels for development into residential lot subdivisions,
the availability of development and long term financing for home builders and
the purchasers of residential dwellings, governmental policies and regulations,
weather, shortages of labor or materials, increases in on-site and off-site
development costs, and other factors. See "RISK FACTORS - Factors Affecting
Business of the Company".
The Company has employment agreementss with its three executive officers,
Messrs. Deutsch, Farkas and Messina The Agreements are all on similar terms
except salary rates. Mr. Deutsch will receive a salary of $120,000 per year and
Messrs. Farkas and Messina will receive $108,000 each. The initial term of the
agreement runs through December 31, 2000. For additional information on the
Company's obligations under the agreements, See "BUSINESS - Employment
Agreements".
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DILUTION
The pro forma information and data presented in this Prospectus section
assumes the consummation of the Transaction. Accordingly, such information and
data regarding existing stockholders of the Company takes into account the
consideration paid by Gateway LLC members for their membership interests in
Gateway LLC and the consideration paid by the other present stockholders for
their shares. See "INTRODUCTORY STATEMENT" and "CERTAIN TRANSACTIONS". The pro
forma net tangible book value of the Common Stock at September 30, 1997,
assuming the Transaction occurred but without giving effect to sale of Common
Stock and Warrants in this offering, was $478,981 or $.20 per share. Net
tangible book value per share of Common Stock is defined as the tangible assets
of the Company, less all liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect as of September 30, 1997 to the sale of
the 1,500,000 shares of Common Stock offered hereby and after deducting the
unpaid estimated offering expenses, the pro forma net tangible book value of the
Common Stock at September 30, 1997 would have been $6,045,231 or $1.57 per
share. This represents an immediate increase in net tangible book value of $1.37
(34.25%) per share to existing stockholders and an immediate dilution of $2.43
(60.75%) per share to new investors purchasing the Shares offered hereby. The
following table illustrates this per share dilution in relationship to the
public offering price:
Amount Percent
Initial public offering price $4.00 100%
Pro forma net tangible book value per share
before offering .20 5%
Increase in pro forma net tangible book value
per share attributable to new investors 1.37 34.25%
------
Pro forma net tangible book value per share after
giving effect to public offering $1.57 39.25%
===== ======
Dilution per share to new investors $2.43 60.75%
===== ======
Neither the foregoing nor the following table gives effect to the exercise
of any of the Warrants to purchase of 4,125,000 of Common Stock included in the
3,000,000 Warrants offered hereby, the outstanding 300,000 Founders Warrants,
the 450,000 Representative's Warrants and the 375,000 options which may be
issued pursuant to a stock option plan subsequently adopted by the Company.
These two tables also do not give effect to the use of the Over-Allotment Option
granted to the Underwriters under which they may purchase up to an additional
225,000 shares of Common Stock and Warrants to purchase 450,000 shares.
The following table summarizes, on a pro forma basis as of September
30, 1997, the total shares of Common Stock purchased and the total consideration
and average price per share paid by existing stockholders and paid by the new
investors purchasing the shares offered hereby without giving any effect to the
$562,500 paid by new investors for the Warrants.
Shares Purchased Total Consideration(1)
---------------- ----------------------
Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
New investors 1,500,000 38.9% $6,000,000 87.7 $ 4.00
Existing stockholders 2,352,000 61.1% $ 845,330 12.3 .36
--------- ----- ---------- ------
Total 3,852,000 100.0% $6,845,330 100.0%
========= ===== ========== ======
(1) Does not include the $562,500 paid by new investors for the Warrants.
26
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USE OF PROCEEDS
All of the proceeds from the sale of shares by the Selling Stockholders
will be retained by them and none of the proceeds will go to or benefit the
Company.
PRO FORMA CAPITALIZATION
The table set forth below presents the pro forma capitalization of the
Company as of September 30, 1997 which takes into account the consummation of
the Transaction, including the sale of the 1,500,000 shares of Common Stock and
3,000,000 Warrants offered hereby. See "INTRODUCTORY STATEMENT" and "CERTAIN
TRANSACTIONS".
September 30, 1997
---------------------------
Prior to
Consummation As Adjusted
of Offering for Offering
Debt $23,304,272 $20,704,272
----------- -----------
Stockholders' Equity:
Common Stock, $.01 par value,
20,000,000 Shares authorized,
2,352,000 Shares outstanding
on a pro forma basis prior to
consummation of the offering
and 3,852,000 Shares outstanding
on a pro forma basis as adjusted
for this offering 23,520 38,520
Additional Paid-in Capital 817,810 6,289,060
Founders Warrants 4,000 4,000
Retained Earning -0- -0-
---- ----
Total Stockholders' Equity 845,330 6,331,580
------- ---------
Total Capitalization $24,149,602 $27,035,852
========== ==========
- -----------------
DIVIDEND POLICY
The Company does not expect to pay dividends on its Common Stock during
the foreseeable future time. Any future decision of the Company's Board of
Directors to pay dividends will be made in the light of the Company's earnings,
financial position, capital requirements and other relevant factors then
existing.
27
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BUSINESS
Introduction
Gateway LLC has primarily engaged in the furnishing of platted,
semi-finished and unfinished lots to the home building industry since its
inception in June, 1993. Its activities have been concentrated in eight cities
and counties in the greater Denver metropolitan area and in the City of Fort
Collins, Colorado. The Company will continue the business activities of Gateway
LLC, either directly or through Gateway LLC, which is expected to continue as a
subsidiary entity of the Company for a now indeterminable period. The management
of the Company does not believe that the present is an appropriate time to make
a definite decision whether or not to continue operating Gateway LLC as a
subsidiary or to merge it into the Company or liquidate its assets and
operations into the Company and conduct all future operations directly out of
the Company. The title to the real properties involved in the present operations
is held in Gateway LLC; and the loan or financing arrangements with respect to
the properties are with Gateway LLC. Company's management presently intends that
future development projects will be acquired directly in and operated by the
Company and that operations out of Gateway LLC will be phased out as the
projects are developed and the properties sold. However, they do not presently
know if there may be future advantages in continuing substantial operations in
Gateway LLC. Accordingly, the information presented below in this Prospectus
section of the activities of the Company, and all references to the Company,
from and after the Effective Date include the activities of Gateway.
The Company's business activities are the outgrowth of the business
activities of Harvey E. Deutsch, Joel H. Farkas and Michael A. Messina, which
involved the acquisition and development of real property to the status of
residential building lots for sale to and use by PrideMark. PrideMark is a
Denver, Colorado based residential home builder controlled by Michael A.
Messina, who is also a director, officer and principal shareholder of the
Company. See "CERTAIN TRANSACTIONS" and "MANAGEMENT". Such activity assisted
PrideMark in assuring an adequate supply of suitable, developed residential lots
for use in the home construction activity of PrideMark without an immediate
requirement that PrideMark contemporaneously commit its capital to the lot
development process.
From this activity, the present business activity of the Company has
developed which involves the acquisition and development of land as residential
subdivisions containing platted, finished or semi-finished building lots
suitable for acquisition, usually on a phased basis, by the residential
production home builders who are or become customers of the Company. Finished
lots are lots as to which all required subdivision improvements have been
completed and which have adjacent access to all utilities with capacity to serve
the lots, have a means of ingress and egress over public roads, and are fully
qualified for issuance of a building permit for construction of a home on the
lot. Semi-finished lots are lots with respect to which subdivision improvements
for utilities, ingress and egress and other required improvements have been
completed to or through a portion of the subdivision, but such improvements have
not been completed to each lot itself. The home builder completes the
development of semi-finished lots into finished lots, in connection with its
construction of homes thereon. From time to time, Gateway also sells parcels of
real property that have been zoned and platted, but are substantially
undeveloped, to home builders. The Company may, from time to time, may also
engage in the home building business.
Presently the home builders who have acquired lots, or are presently under
contract to acquire from the Company are PrideMark Homes, US Home, Melody Homes,
Sheffield Homes, Continental Homes, Sundown Development, Paul Adam Custom Homes,
d/b/a Odyssey Homes, Meadow Homes and Strauss Homes. Substantially all of the
lots developed to date by Gateway LLC have been intended for use for single
family residential production homes and townhomes or duplexes.
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<PAGE>
The Residential Home Building Industry
The residential home building industry has three primary components: land
acquisition, land development, and home construction and sales. There is
considerable overlap among those who participate in one or more of the
components of the industry. Investors purchase undeveloped or under utilized
real estate with a view to realizing appreciation in value as a result of urban
or suburban growth, but usually do not engage in development activities.
Developers, such as the Company, typically purchase real property which is
usually unimproved and unplatted but is appropriately zoned for development and
develop such property into subdivisions containing platted, semi-finished or
finished lots for sale to home builders. Home builders either acquire finished
lots or acquire and develop land into finished lots for their own home building
activities.
In the home construction and sales component of the industry, there are
four major areas of activity: (i) building custom homes; (ii) building
production homes; (iii) building town homes, condominiums and apartments; and
(iv) remodelings. Smaller home builders generally concentrate their activities
in two or three of these areas while larger home builders tend to have
operations in almost all activity areas. Home builders classified as production
home builders dominate the market. A production home builder builds a
substantial number of homes each year from standard plans and specifications
that have limited structural options but generally offer various floor plans,
elevations or upgrade options.
The activities of Gateway LLC to date have been concentrated in the greater
Denver, Colorado metropolitan area and the City of Fort Collins, Colorado, and a
significant portion of the Company's activities during the future time are also
expected to be concentrated in these areas.
Denver is the capital city of the State of Colorado and the Denver
metropolitan area is the principal economic center of the Rocky Mountain region.
The metropolitan Denver area is comprised of six counties: Denver, Adams,
Arapahoe, Boulder, Douglas and Jefferson. The City of Fort Collins is located in
northern Colorado along the eastern slope of the Rocky Mountains. It is the
largest city of the northern Colorado region and the seat of Larimer County. Ft.
Collins is located 65 miles north of Denver via Interstate Highway No. 25 and 30
miles south of the Wyoming border.
The management of the Company believes, based upon information available to
the Company and believed reliable, that the residential construction industry in
the Denver, Colorado metropolitan area and in the City of Fort Collins is very
fragmented with many individual businesses that have small dollar or unit sales
volumes. The Denver metropolitan area also is characterized, however, by the
presence of several large production home building companies that construct the
majority of single family homes in the area. The Company believes that for the
nine month period ending September 1997, the largest ten home builders in the
metropolitan Denver, Colorado area constituted approximately 67% of the single
family home construction activity that occurs in the area during such period.
The residential home building industry in the Denver, Colorado
metropolitan area has experienced dramatic changes during the period 1975-1996.
In the late 1970's and early 1980's, the Denver metropolitan area experienced
rapid growth and substantial residential construction activity. The period
1985-1989 was characterized by deteriorating economic conditions and an
increasing oversupply of homes in the Denver, Colorado area. During this period
there were record foreclosures, bankruptcies and financial institution failures.
The demise of numerous financial institutions in the mid to late 1980's
resulted in the imposition of stringent regulatory restrictions on commercial
banks and other financial institutions engaged in real estate lending. As a
result, sources of financing became more limited and restricted. Other
regulatory factors relating to environmental concerns and concerns regarding the
pace and rate of development in the Denver metropolitan area have, in the
opinion of the Company, significantly increased the regulatory impact which is
presently experienced by firms engaged in residential home building.
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<PAGE>
Gateway LLC has primarily engaged in the furnishing of platted,
semi-finished and unfinished lots to the home building industry since its
inception in June, 1993. Its activities have been concentrated in eight cities
and counties in the greater Denver metropolitan area and in the City of Fort
Collins, Colorado. The Company will continue the business activities of Gateway
LLC, either directly or through Gateway LLC, which is expected to continue as a
subsidiary entity of the Company for a now indeterminable period. The management
of the Company does not believe that the present is an appropriate time to make
a definite decision whether or not to continue operating Gateway LLC as a
subsidiary or to merge it into the Company or liquidate its assets and
operations into the Company and conduct all future operations directly out of
the Company. The title to the real properties involved in the present operations
is held in Gateway LLC; and the loan or financing arrangements with respect to
the properties are with Gateway LLC. Company's management presently intends that
future development projects will be acquired directly in and operated by the
Company and that operations out of Gateway LLC will be phased out as the
projects are developed and the properties sold. However, they do not presently
know if there may be future advantages in continuing substantial operations in
Gateway LLC. Accordingly, the information presented below in this Prospectus
section of the activities of the Company, and all references to the Company,
from and after the Effective Date include the activities of Gateway.
Until very recently, there has been very little accessible data available
regarding the volume of new home sales in the City of Fort Collins. However,
based upon the information available to the Company and believed reliable, it
appears that home sales in the City of Fort Collins generally follow the same
trend as for the Denver metropolitan area. The City of Fort Collins experienced
a period of strong growth in the late 1970's and early 1980's, a decline in home
sales in the mid 1980's, and a recovery and corresponding increase in home sales
beginning in late 1988 and 1989. Home sales for the period 1989 through 1995
exceeded those of prior years, and 1996 saw an increase of 24.2% over 1995.
Sales results for the first nine months of 1997 also show an increase of 9.3%
over the same period in 1996.
Property Acquisition by the Company
The business activities of Gateway LLC have been, and the business
activities of the Company primarily will be, the purchase of real property that
is zoned or can be zoned for residential use and the development of such
purchased property into platted, finished or semi-finished lots for sale to home
builders who will construct a single family detached or multi-family attached
homes on such lots. See Introduction above for a description of what constitutes
"platted", "finished" and "semi-finished" lots. The developed lots generally are
between 5,000 and 6,000 square feet in size and homes constructed on these lots
generally are priced between $100,000 and $250,000, including the lots. From
time to time, the Company will acquire parcels of real property, complete the
platting process and then sell the zoned and platted parcels to home builders
who will develop such properties themselves.
With respect to land acquired for immediate development into lots and as
to which the Company has a sales contract with a home builder for sale of the
finished lots, the sales price of the platted, finished or semi finished lots to
the home builder will be a significant factor in determining the price per lot
which can be paid by the Company, taking into account the development costs
which are required to be incurred by the Company prior to the lot being sold in
platted, semi-finished or finished status to the residential home builder. With
respect to land purchased for development but as to which no current sales
contract has been negotiated, an independent appraisal will be a significant
factor in determining the price per lot that will be paid by Company.
The Company seeks to maintain purchase option contracts for real estate
properties covering a four to seven year supply of lots, based upon current lot
absorption information. In that manner, the Company seeks to assure that there
are sufficient lots under its control to provide a supply for its business in
the reasonably foreseeable future. Generally, the Company will exercise options
to purchase properties at a level intended to meet its home builder customers'
demands for a two to four year period based upon sales contracts with such home
builders. In the normal course of business, the Company will purchase properties
for which there are no contracts for sale to home builders.
30
<PAGE>
The Company seeks to achieve a sales price to its home builder customers
which will yield to the Company an adequate gross margin, before selling
expenses, general and administrative expenses, financing costs and other
non-capitalized costs of the Company, taking into account the amount of money
expended by the Company for property acquisition and development of the property
as a platted subdivi sion containing finished and semi-finished lots. In its
effort to achieve such a gross margin, with respect to property intended to be
developed in the immediate future, the Company utilizes independent appraisals
to verify the fair market value of the property when acquired. For properties
that will not be developed immediately and/or for which the Company has no sales
contracts with home builder customers, the Company obtains independent
appraisals to verify the fair market value of the property upon acquisition. The
Company then uses development budget estimates and management's estimates of the
potential selling price of lots based upon management's experience with the
market and the Company's home builder customers to determine the estimated fair
market value of finished and semi-finished lots. From its organization through
December 31, 1996, the Company's lot sales have increased from fewer than 20
lots sold in 1994, to 194 lots sold in 1995, to 478 lots sold in 1996. For the
nine month period ending September 30, 1997, Gateway LLC has sold 340 lots.
A significant amount of the Company's real property purchases and sales
have previously been with affiliated parties. See "CERTAIN TRANSACTIONS". The
Company uses the same procedures and policies in determining the sales prices of
lots sold to affiliated parties as those used in setting the sales prices for
transactions with non-affiliated parties.
Present Development Activities
The development activities of the Company will include the accomplishment
of all legal and regulatory requirements for the subdivision plat and
substantial completion of the subdivision infrastructure (streets, water and
sewer systems, gas and electric lines, curb and gutter, landscaping, entry
monumentation and related improvements).
The Company is presently developing and/or platting lots for the nine home
builders, listed in Marketing of Subdivision Lots below. Since its inception,
Gateway's annual sales have increased from less than 20 lots sold in 1994 to 478
lots in 1996 to 340 lots for the first nine months of 1997. As of September 30,
1997, the Company had contracts for builders to purchase lots in excess of
$12,000,000 market value. Since September 30, 1997 to the date hereof, the
Company executed additional contracts with builders which bring the Company's
total market value of outstanding contracts to in excess of $15,250,000. These
contracts call for lot delivery from 1997 through the year 2000.
The Company's inventory of lots under development is presently contained in
subdivisions known as Sterling Hills, Aurora, Colorado; Country Hills, Thornton,
Colorado; Willow Run, Broomfield, Colorado; and Gateway Village, Denver,
Colorado; all of which subdivisions are located in the greater Denver, Colorado
metropolitan area. In addition, the Company is currently planning lots in the
Riverdale subdivision in Thornton, Colorado. Also, the Company is presently
building in Roxborough Park in Douglas County, Colorado. The West Star
Subdivision, in Lakewood, Colorado, has been platted and sold. Also, Downing
Park, Thornton, Colorado, and Quail Run, Aurora, Colorado have been developed
and sold. The Company also has lots under development in the Harmony Crossing
and Overland Trail subdivisions which are located in Fort Collins, Colorado.
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32
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Marketing of Subdivision Lots
The Company sells its platted, finished and semi-finished lots primarily to
production home builders. Production home builders are believed by the Company
to be the dominant factor in the residential home building industry as conducted
in the greater Denver, Colorado metropolitan area. The Company estimates that in
such area, the largest ten home builders constituted approximately 48% of new
home sales which occurred in the nine month period ended September 30, 1997. In
summary, a production home builder is a home builder building a substantial
number of homes each year from standard plans and specifications that have
limited structural options but generally offer various floor plans, elevation or
upgrade options.
From its inception through December 31, 1996, Gateway LLC sold or has
contracted to sell platted, finished and semi-finished lots to nine home
builders conducting their operations in the greater Denver, and Ft. Collins,
Colorado metropolitan areas. Such home builders are PrideMark Homes, US Home,
Melody Homes, Sheffield Homes, Continental Homes, Paul Adam Custom Homes, d/b/a
Odyssey Homes, Meadow Homes, Sundown Development, and Strauss Homes. From
Gateway's inception through December 31, 1994, virtually all of Gateway LLC's
lot sales were to PrideMark. For the 33 month period beginning January 1, 1995,
approximately 68% of the Company's lot sales were to PrideMark. It is
anticipated that the sales to PrideMark Homes will constitute approximately
one-third to one-half of the Company's future lot sales over the next 12 months.
PrideMark is principally owned by Michael A. Messina who also is a
principal shareholder, director and officer of the Company. See "CERTAIN
TRANSACTIONS" and "MANAGEMENT". PrideMark was formed in late 1987 and since
formation has purchased finished lots primarily from various financial
institutions. Commencing in 1992, PrideMark began developing, platting and
acquiring lots to serve its own home building needs. Homes built by PrideMark
are primarily single family homes for middle income families and range in price
from $80,000 to $200,000. The majority of homes constructed by PrideMark Homes
are in the $90,000 to $150,000 range. According to "The Front Range Housing
Market Letter" published by David Laffoon, September 1997, PrideMark was ranked
fourth among Denver area builders for new home closings for the first seven
months of 1997 and closed 390 homes during that period.
US Home was established in 1954 and is currently believed to build homes
primarily for first time home buyers and retirement second home buyers. It is
estimated that US Home has built more than 250,000 homes during the past
approximately 40 years. Presently US Home is believed to construct residential
dwelling units in approximately 200 communities in 32 metropolitan areas located
in 12 states throughout the United States, including Arizona, California,
Colorado, Florida, Maryland, Minnesota, Nevada, New Jersey, Texas and Virginia.
The management of the Company believes that US Home is one of the ten largest
single family on-site home builders in the United States. According to "The
Front Range Housing Market Letter" published by David Laffoon, September 1997,
US Home was ranked first among Denver area builders for new home closings for
the first seven months of 1997 and closed 554 homes during that period.
Melody Homes is one of the largest builders of single family detached homes
in the Denver metro area. According to "The Front Range Housing Market Letter"
published by David Laffoon, September 1997, Melody Homes was ranked third among
Denver area builders for new home closings for the first seven months of 1997
and closed 478 homes during that period.
33
<PAGE>
Continental Homes was founded in Denver in 1986 and has been the only
builder to join the ten best selling builders in the Denver metro area.
According to "The Front Range Housing Market Letter" published by David Laffoon,
September 1997, Continental was ranked sixth among Denver area builders for new
home closings for the first seven months of 1997 and closed 308 homes during
that period.
Sheffield Homes was founded in 1978 and builds single family detached
homes for the first home and move-up home buyer.
Sundown Development builds single-family detached homes for the first-time
home buyer.
Strauss Homes, LLC, founded in 1994 builds affordable housing in the
Denver metro area.
Paul Adam Custom Homes d/b/a Odyssey Homes began building in this region
in 1996 and builds single family detached homes in the Denver metro area.
Meadow Homes began in Denver in 1984 is one of the metro areas providers
of single family homes. According to "The Front Range Housing Market Letter"
published by David Laffoon, September 1997, Meadow Homes was ranked among the
top 25 Denver area builders for new home closings for the first seven months of
1997 and closed 64 homes during that period.
The Company's sales transactions involving its inventory of platted,
finished and semi-finished lots result from negotiated transactions that are
usually undertaken by the Company at a time contemporaneous or prior to the
development of such property. The sales contracts entered into between the
Company and its home builder customers are generally option contracts. In some
cases, the lot sales contracts contain specific performance provisions requiring
the homebuilder to close on the subject lots. In other cases, homebuilders have
made a deposit of funds on executed sales contracts. Under such option
contracts, home builders who are customers of the Company may only be required
to purchase a minimum number of lots at specified times and prices. See "RISK
FACTORS - Factors Affecting Business of Company, Other Operational Risks and
Market Risks".
Regulatory Factors. As part of the zoning and subdivision processes, a
developer such as the Company generally is required to agree to complete certain
improve ments to the subdivided property ("on-site improvements") which provide
service to the property, and, in some instances, improvements to neighboring
properties ("off-site improvements") which service the proposed subdivision,
before the lots will qualify for issuance of a building permit. Until a lot can
qualify for issuance of a building permit, it is not ordinarily marketable by
the Company to a home builder. The required off-site improvements can include
such matters as acquisition and completion of service roads and utilities to the
subject property, acquisition of off-site storm water drainage facilities and
dedication (or payment in lieu of dedication) of lands and improvements for
parks or other greenbelt or open space areas. On-site improvement requirements
can include completion of streets and service utilities to each lot and
completion of on-site drainage facilities, parks or open space areas. Once
installation requirements are met and building permits are issued, developers
such as the Company, in most instances are required to provide maintenance of
the improvements for a period of time following their installation (usually one
year) before the governing bodies will accept the improvements for public
maintenance. To secure the obligation to maintain, developers are required to
post collateral with the governing agencies in the form of bonds, cash or
letters of credit in a percentage of the total cost of the improvements. If more
than one developer is involved in a subdivision, the development obligations are
generally joint and several to the several developers. Sometimes such
34
<PAGE>
development obligations are allowed to be phased as lots are completed and
houses built and sold, and sometimes the development obligations are apportioned
among the developers by agreement.
Additional Capital Needs. Gateway LLC has, and the Company will have
substantial "on-site" and "off-site" improvement obligations with respect to
real property intended to be developed. The Company estimates that additional
funds will be required for the development of the platted, unfinished and
semi-finished lots intended to be acquired and developed by the Company in the
future. Such additional required funds are anticipated to be provided from the
proceeds of the offering, sales of lots in a finished state and the creation of
additional debt obligations. In the event that sufficient proceeds are not
available from those sources, lots in an unfinished status may have to be sold
at significantly reduced prices. The management of the Company is of the opinion
that the net proceeds from this offering of Common Stock and Warrants, and
proceeds realized from the on-going sale of platted, semi-finished and finished
lots will be sufficient to meet the Company's anticipated cash needs and finance
its operations for at least 12 months from the date of this Prospectus. However,
no assurance can be given that the Company will not require additional funding
or if such additional funding is required, that such will be available in
amounts and upon terms acceptable to the Company.
Competition
In the acquisition of real property suitable for development as platted,
finished and semi-finished residential building lots and the marketing of such
lots, the Company encounters significant competition from other development
entities, from home builders who conduct their own lot development activities
and from investors who compete with the Company with respect to the acquisition
of suitable sites for development. The Company's competitive position in its
industry will be largely dependent upon the ability of the management of the
Company to identify suitable sites for acquisition at a time when such sites are
not being actively pursued for acquisition by any competitive entity or person.
This will require that the Company continually investigate suitable sites for
acquisition in its areas of operation. The Company's competitive position will
also be substantially dependent upon the relative amount of capital available to
it with respect to its ability to acquire suitable real estate sites for
development as finished and semi-finished lots and to engage in the necessary
development activities within a period of time permitting the sale of platted,
semi-finished and finished lots to its lot purchase customers.
The Company's acquisition and development activities will also be affected
by the relative financial condition of its home builder customers and by the
competitive factors which affect the home building and home marketing activities
of its home builder customers. Factors such as location, relative price,
subdivision attractiveness and amenities, available home design options and
aesthetic factors may have a pronounced affect on the acceptance of homes
constructed in subdivisions which have been developed by the Company and
acquired by its home builder customers.
The management of the Company is of the opinion that: its present
competitive posture is good; it has adequate capital to pursue its business
activities; and the capital from the offering made hereby will enhance its
competitive status.
The Company's competitive position will also be affected by the general
conditions existing in the residential home building industry, as such exists in
the Company's area of operations. See "The Residential Home Building Industry",
above, and "RISK FACTORS - Factors Affecting Business of the Company".
Employees
In addition to its executive personnel and key management employees, the
Company has 12 employees, which are primarily engaged in administrative
activities. None of the employees are represented by a union and the Company has
not had any work stoppages. The Company considers its relations with its
employees to be good. See "MANAGEMENT".
35
<PAGE>
Other Activities
In addition to its land acquisition and development activities, Gateway LLC
has provided, on a fee basis, services involved in forming special districts,
building authorities and homeowners' associations relating to properties
developed by it and has performed administrative, accounting and management
services in connection with those districts, building authorities and
homeowners' associations, pending completion of the subdivision and sales of
finished lots to home builders or subdivision residents. The Company will
continue to engage in these activities conducted by Gateway LLC.
The Company is a member of a group of investors and real estate developers
that has made an unsolicited offer to purchase the former Stapleton
International Airport site in Denver, Colorado. Presently the property is owned
by the City and County of Denver ("City") and managed by a non-profit entity
(the "Stapleton Development Corporation"). The City has not yet made a
determination whether it wishes to privatize the redevelopment. If the City does
determine to privatize the redevelopment, it would determine whether the sale
would be negotiated or based upon an open bid procedure. On January 23, 1998,
the Chief Operating Officer of Stapleton Redevelopment Corporation, after a
meeting with officers of the Company, forwarded the Company a letter indicating
that the City and Stapleton Redevelopment Corporation are presently addressing
issues of demolition of existing structures, infrastructure installation,
coordination and financing and zoning issues. He indicated that Stapleton
Development Corporation would be in contact with with the Company after March
31, 1998 to schedule additional discussions. During a recent meeting with the
Stapleton Development Corporation, it was indicated to the Company that the City
and Stapleton Development Corporationmay wish to sell individual parcels
comprising less than all of the property and that they are considering a bidding
process for such sales. The Company does not yet know the location or the
acreage that would be sold, the permitted land uses for such acreage, the price,
the costs of infrastructure installation, associated demolition costs or the
other costs of development of any particular portion of the property to be
offered for sale. Because of these uncertainties, there is no way to determine
whether the Company would continue to be interested in the acquisition of all or
a portion of the property or the impact on the Company in the event of a
purchase. There is no assurance that, even in the event the City decides to sell
any or all of the property, the investment group of which the Company is a
member would be successful in any purchase efforts.
Future Activities
Subsequent to the completion of the offering made hereby, the Company will
continue to explore suitable real estate properties for acquisition and
development into semi-finished and finished lots for sale to residential home
builders. The Company will also consider opportunities to acquire and develop
non-residential properties, i.e. rental, commercial, warehouse and office, and
may engage in development, sales and leasing of such properties. Such activities
are expected to be conducted in Colorado, principally in the greater Denver,
Colorado metropolitan area, and surrounding communities such as Fort Collins.
Currently, the Company acquires most of its real estate properties for
development and sale to its home builder customers. It is anticipated that the
Company in the future may acquire a greater number of real estate properties as
long term holdings for which the Company has no immediate development plans and
no contracts for the sale of finished lots therein to home builders. Similarly,
while the Company's operations currently are conducted in Colorado, the Company
in the future may expand its operations to other states. The Company may also
engage in other activities in the real estate business or activities related
thereto.
CERTAIN TRANSACTIONS
The Transaction
Apollo III, Inc., a Florida Corporation ("Apollo") was organized on
December 23, 1992 for the purpose of acquiring or consolidating with one or more
other business entities. On January 12, 1995, Gateway American Properties
Corporation, a Florida Corporation ("Gateway American-Florida") was formed as an
affiliate of Apollo for the purpose of entering a business combination
involving; (i) the merger of Apollo into Gateway American-Florida; (ii) the
acquisition by Gateway American-Florida of all the outstanding membership
interests in Gateway LLC, a Colorado limited liability; and (iii) the
acquisition of capital fund from a public offering of securities of Gateway
American-Florida. After filing a Registration Statement with respect to proposed
public offering of Gateway American-Florida securities to be underwritten by the
Representative, the project was voluntarily delayed. Prior to the resumption of
the project, Apollo was merged into Gateway American-Florida in exchange for
274,000 shares of the Common Stock of Gateway American - Florida. Gateway
36
<PAGE>
American-Florida later redomesticated into a Colorado corporation through a
statutory merger with the Company as the surviving corporation. In this merger
the shareholders of Gateway American- Florida received 327,000 shares of the
Company's Common Stock and 300,000 Founders Warrants. Gateway American-Florida
and Apollo are both considered as "predecessors" of the Company as that term is
defined under the Securities Act of 1933, as amended. For Additional details on
the history of the Transaction, see "INTRODUCTORY STATEMENT".
The Company immediately prior to the Effective Date, and as an integral
part of the offering made in this Prospectus, consummated the Transaction
provided for pursuant to an agreement styled Amended and Restated Agreement
Providing for Sale and Exchange of Capital Stock ("Agreement") which was made
and entered into by and between the Company and Gateway LLC effective January
27, 1997. Pursuant to the provisions of the Agreement, the Company acquired all
of the outstanding membership interests of Gateway LLC which were outstanding as
of the Closing Date (as specified in the Agreement) in exchange for 2,025,000
shares of Common Stock. Of such Shares 1,822,500 were issued to Harvey E.
Deutsch, Joel H. Farkas and Michael A. Messina or members of their families. See
"MANAGEMENT" and "PRINCIPAL SHAREHOLDERS".
The shares of Common Stock and Founders Warrants of the Company issued with
respect to the merger with Gateway American-Florida and the shares of common
stock underlying the Founders Warrants have been registered pursuant to the
Registration Statement of which this Prospectus is a part are subject to certain
restrictions upon their sale. With respect to 27,000 shares of the Company's
stock, they may not be sold for 90 days from the Effective Date. The remaining
300,000 shares of the outstanding Common Stock of and the 300,000 shares
underlying the Warrants are subject to "lock-up" provisions for 15 months from
the Effective Date. In summary, the lock-up provisions affecting such shares
prohibit the holders thereof from effecting any sales transactions in the market
for such shares except upon the written consent of the Representative. The
2,025,000 shares issued by the Company in connection with its acquisition of all
of the membership interests of Gateway LLC have not been registered and
constitute Restricted Securities. As Restricted Securities, such shares may only
be sold subsequent to the time that the holders thereof have held the shares for
a period of one year, and upon compliance with certain reporting requirements
established by the Commission. See "RISK FACTORS - Shares Eligible for Future
Sale" and "DESCRIPTION OF SECURITIES".
Certain Purchase/Sale Transactions
Property Purchases from Affiliates. From its inception in June 1993 to
date, Gateway LLC has effected purchases of real estate properties which it has
developed or will develop into platted, finished and semi-finished lots from
limited liability companies and limited partnership entities in which certain of
the executive officers of the Company had an interest. In the past, it was the
practice of Messrs. Deutsch, Farkas and Messina to form limited liability
companies or limited partnerships in which they and others would have an
economic interest in order to acquire real estate properties which were in a
condition or state of development making their acquisition by Gateway LLC and
presently the Company inappropriate or premature. During the period of time that
such real estate properties were held by such entities, appropri ate and
necessary regulatory approvals and other development activities were undertaken
and if success fully accomplished, permitted the real estate properties acquired
to be qualified for purchase by Gateway LLC. The prices paid by Gateway LLC with
respect to such real estate properties purchased were determined by real
property appraisals provided by independent sources of expert appraisal or on a
negotiated basis and are believed in all respects to fairly relate to the prices
that would have been paid by Gateway LLC with respect to any transaction with a
non-affiliated person or entity. Each of these transactions was made on terms no
less favorable to the Company than could have been obtained from unrelated
parties. After the Public Offering, any purchases made by Gateway LLC from
Messrs. Deutsch, Farkas, or Messina will be 10% below the fair market value
based on independent expert appraisals.
37
<PAGE>
The table set forth below summarizes these historical acquisition
transactions.
<TABLE>
<CAPTION>
Conveying Affiliated Entity Conveying Entity Interest Approx. Approximate Approximate
Project and Property Conveyed Held by Affiliated Party Purchase Affiliate Cost Profit to
Price to of the Property Affiliated
Gateway & & Date of Party
Affiliate %Interest Date of Purchase
Purchase
- ----------------------------- ------------------------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Downing Park, LLC, Downing Harvey E. Deutsch 25% $387,000 $373,000 $104,750
Park, 132 Lots Joel H. Farkas 25% on 6-1-95 8-12-93 $104,750
Michael A. Messina 50% $405,000 on $209,500
11-14-95
PrideMark Homes, Harmony Michael A. Messina 93% $1,089,112 $1,089,113 ---
Crossing, 221 Lots 11-4-94 5-16-94
PrideMark Homes, Willow Run Michael A. Messina 93% $342,000 $342,000 ---
Filing I, Phase 2 & 3 57 Lots 4-7-95 3-21-94
6-1-95
Willow Run Holdings, LLC, Harvey E. Deutsch 1.8% $342,273 $342,273 ---
low Run II, 88 Lots(1) Joel H. Farkas 1.8% 10-21-94 12-17-93
Willow Run Holdings, LLC, Harvey E. Deutsch 1.8% $1,511,400 $922,500 $16,663
low Run IV & V, 295 Lots(1) Joel H. Farkas 1.8% 3-23-95 12-17-93 $16,663
8-8-95
5-17-96
Gateway Village, LLC, Gateway Harvey E. Deutsch 41.6% $567,800 $61,400 $210,662
Village, Filing I, 128 Lots Joel H. Farkas 41.6% 11-4-94 2-16-93 $210,662
3-8-95
Gateway Village, LLC, Gateway Harvey E. Deutsch 41.6% $778,180 $55,220 $300,750
Village, Filing II, 146 Lots Joel H. Farkas 41.6% 9-17-96 2-16-93 $300,750
Gateway Village, LLC, Gateway Harvey E. Deutsch 41.6% $687,500 $46,500 $266,650
Village, Filing III, 124 Lots Joel H. Farkas 41.6% 7-31-97 2-16-93 $266,650
Gateway Village, LLC, Gateway Harvey E. Deutsch $1,043,750 $62,625 $408,148
Village, Filing III, 167 Lots Joel H. Farkas 8-18-95 2-16-93 $408,148
PrideMark Homes, Sterling Michael A. Messina $693,750 $693,750 ---
Hills (No. 1), 75 Lots 6-26-96 5-5-95
Sterling Hills Ltd., Sterling Harvey E. Deutsch 16%(2) $576,000 $347,000 $36,640
(No. 2), 96 Lots Joel H. Farkas 16%(2) 12-12-94 12-12-94 $36,640
Michael A. Messina 16.5%(3) $37,785
612 Corporation 1%(2) $ 2,290
612 Corp., Country Hills Harvey E. Deutsch 50%(4) $541,400 $468,000 $36,700
(No. 6), 78 Lots(4) Joel H. Farkas 50%(4) 8-18-95 7-14-95 $36,700
Sterling Hills Ltd. Buyout Harvey E. Deutsch See 5 below See 5 below See 5 below
Joel H. Farkas
Michael A. Messina
</TABLE>
- --------------------
38
<PAGE>
(1) Messrs. Deutsch and Farkas each own a 32.5% shareholder interest in Wilrun
Corp. Wilrun Corp. was the beneficial owner of an 11.11% membership
interest in the conveying entity, Willow Run Holdings LLC.
(2) Messrs. Deutsch and Farkas each own 50% of the outstanding common stock of
612 Corp. 612 Corp. held 1% general partnership interest in the conveying
entity, Sterling Hills, Ltd. Messrs. Deutsch and Farkas also held a 16%
interest as limited partners in the conveying entity, Sterling Hills, Ltd.
(3) Mr. Messina's 16.5% interest in the conveying entity, Sterling Hills, Ltd.
was a limited partnership interest.
(4) Messrs. Deutsch and Farkas each own 50% of the outstanding common stock of
612 Corp., the conveying entity in this transaction.
(5) Gateway American Properties, LLC bought out Sterling Hills, Ltd. on
7-31-96 in an amount equal to partners' capital accounts with principal
payments due quarterly beginning 9-15-97:
612 Corp. received a note for $5,391.76
515 Capital " " $86,186.65
DSR LLC " " $85,202.65
Michael A. Messina " $88,882.53
As of the date of this Prospectus, Harvey E. Deutsch and Joel H. Farkas
continue to own equity interests in certain limited liability companies or
limited partnerships which may in the future convey real estate properties to
the Company for development by the Company into finished or semi-finished lots.
Such entities include those entities identified in the table presented above.
The purchase price to be paid by the Company to such entities in the event of
the purchase of real estate properties by the Company from such entities will be
largely determined, if not entirely determined and governed by fair market
appraisals provided by sources of independent expert appraisal, will be at a
price 10% below the fair market value so determined and must be approved by the
Company's independent directors.
Lot Sales to Affiliate. Also since the inception of Gateway LLC, Gateway
LLC has sold finished or semi-finished lots to PrideMark Homes, a home
construction firm substantially owned by Michael A. Messina, a principal
shareholder, director and officer of the Company. As indicated elsewhere in this
Prospectus, the prices paid by PrideMark Homes to Gateway LLC and which in the
future may be paid to the Company have or will relate to the appraised value of
such platted, finished or semi-finished lots as determined by fair market value
appraisals provided by independent sources of expert appraisal. The table set
forth below summarizes the lot sales transactions made by Gateway LLC to
PrideMark Homes which have occurred since the inception of Gateway LLC to
December 31, 1996.
39
<PAGE>
Approximate cost
# of (including Interests
Lots Price & Taxes) to Gateway.
Property Conveyed as of 12-31-96 ------ ----- --------------------
- --------------------------------
Country Hills, Filing 6, Phase 1 26 $714,086.55 $505,759.24
Downing Park, Phase 1 64 $1,537,658.22 $765,147.12
Downing Park, Phase 2 10 $215,000.00 $220,000.00
Gateway Village, Filing 1, Phase 5 45 $756,388.00 $502,747.35
Gateway Village, Filing 1, Phase 4 41 $726,923.28 $588,304.77
Gateway Village (17 Lots) 17 $212,500.00 $212,500.00
Sterling Hills, Filing 1, Phases 1 & 2 75 $1,995,337.25 $1,737,348.44
Willow Run, Filing 1, Phase 2 28 $700,698.22 $503,596.48
Willow Run, Filing 1, Phase 3 29 $726,292.42 $501,370.97
Willow Run, Filing 2 55 $1,361,250.00 $811,865.93
Quail Run 103 $1,165,086.96 $969,585.14
Competing Development Activities. Michael A. Messina, a director,
principal shareholder and officer of the Company and the principal owner of
PrideMark, is also the principal owner of Richland Development Company, LLC,
("Richland Development"), a Colorado limited liability company. Richland
Development is engaged in the same lot development business as the Company and
in the same area. Thus, Richland Development directly competes with the Company;
and an expansion of the activities of Richland Development could have a direct
impact upon the Company's future lot sales to its present largest customer.
In 1995, the Company furnished land development services to Richland
Development on a fee basis for which the Company was paid $188,475. It is not
now anticipated that the Company will furnish any services to Richland
Development in the future.
Harvey E. Deutsch, Joel H. Farkas, and Michael A. Messina also have
interest in other parcels of real property in the Denver metro area which may
compete with the Company. Norman A. Sheldon and Robert A. Lembke, directors of
the Company also engage in land development and investment activities which may
be deemed to be in competition with the Company.
Company Headquarters
As of the date of this Prospectus, the Company's administrative
headquarters are located at 9145 East Kenyon Avenue, Suite 200, Denver, Colorado
80237. Such commercial space is occupied and utilized by the Company and
consists of approximately 4,288 square feet. It is leased in accordance with a
written lease existing between Gateway LLC(now assumed by the Company) and 9145
E. Kenyon, LLC, of which Harvey E. Deutsch and Norman A. Sheldon are managers
and members. In June 1997, the Company renewed its lease for a three year period
beginning October 31, 1997. Under the terms of the new agreement, the Company is
to pay $5,773 per month for the first year with escalation clauses in years two
and three. The Company also has an agreement with the related party law firm,
whereby the law firm will reimburse the Company $1,325 per month for office
space occupied by the law firm.
40
<PAGE>
Providing of Certain Legal Services
Harvey E. Deutsch, Esq. is a shareholder and principal of the law firm of
Deutsch, Spillane & Reutzel, P.C. The firm also maintains its offices at the
same location as the Company as identified above. Since inception, the firm has
provided various legal services to Gateway LLC and will continue to provide
various legal services to the Company relating to the development activities of
Gateway LLC and the Company, which services will include permitting, zoning
matters, negotiations with municipalities and other governmental units, land
acquisition, subdivision platting and filings and similar matters. During the
past three fiscal years ending on December 31 of each year, Gateway LLC has paid
the following legal fees to the firm; $64,600 in 1994; $241,159 in 1995; and
$432,636 in 1996. For the nine month period ended September 30, 1997 the Company
had paid $178,833 for legal fees and was indebted to the firm for an additional
$392,597. Immediately subsequent to the consummation of the Transaction, Harvey
E. Deutsch is expected to devote approximately two-thirds of his business time
to the position of President and Chief Executive Officer of the Company and will
alter his position with his law firm to that of "of counsel." In all events, Mr.
Deutsch's attention to the practice of law is expected to be substantially
reduced in the light of his duties to the Company and Mr. Deutsch will then have
no further economic interest in the fees paid to the law firm by the Company for
services rendered subsequent to the Effective Date. See "MANAGEMENT".
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name and Age Positions Held With the Company
- ------------ -------------------------------
Harvey E. Deutsch, age 57 Chairman, President and Chief Executive Officer
and Director
Joel H. Farkas, age 36 Director, Vice President-Finance/ Marketing and
Treasurer (Chief Operating Officer)
and Secretary
Michael A. Messina, age 49 Director and Vice President of Development
Robert A. Lembke, age 42 Director
Norman A. Sheldon, age 54 Director
All director terms expire June 30, 1998.
41
<PAGE>
Harvey E. Deutsch was a founding member of Gateway LLC and has been active
in its business operations since its inception in June 1993. After graduating
from Southern Methodist University, Mr. Deutsch went on to obtain a law degree
from the University of Texas. Additionally, Mr. Deutsch has practiced law for
approximately 30 years in Denver, Colorado and has specialized principally in
real estate law. His practice experience includes significant real estate
property acquisitions, development law, matters relating to financing and
leasing transactions, as well as planning, zoning, land use, water, sewer,
general utility district law, environmental matters and legal matters relating
to municipal and quasi- municipal financing of real property project
infrastructures. Mr. Deutsch is presently a principal of Deutsch, Spillane &
Reutzel, P.C., Denver, Colorado, a firm specializing in real estate, zoning and
land use matters.
Joel H. Farkas was also a founding member of Gateway LLC and has been
active in its business operations since its inception in June, 1993. Mr. Farkas
has been engaged in land acquisition, development and finance in Colorado and
Arizona since December, 1984, first as an employee of Farkas Group, Inc., a
family-owned company from 1984 to 1990 and then individually from 1990 to the
present. Mr. Farkas holds a Bachelor of Science degree from the University of
California, Los Angeles.
Michael A. Messina was also a founding member and has been a member of
Gateway LLC since its inception in June 1993. Mr. Messina is a Manager and
controlling member of PrideMark Home Building Group, LLC and Richland
Development Company, LLC (collectively "Richland Homes"), which he founded in
1987. PrideMark is a Denver Metropolitan area home builder and the largest
purchaser of developed lots from the Company in its operations to date. Richland
Development Company, LLC is engaged in the same property acquisitions and lot
development business and in the same areas as the Company. In addition to this
general management responsibilities for those companies, Mr. Messina's focus and
principal activities have related to land acquisition and residential dwelling
product development. Mr. Messina began his career in 1966 with Perl-Mack
Companies, a contracting firm which constructed commercial and residential
projects in the greater Denver, Colorado area. Over the course of his career,
Mr. Messina has developed and built over 5,000 residential dwellings and several
commercial and multi-family projects.
Robert A. Lembke was engaged in the private practice of law in the Denver,
Colorado area from 1979 to 1997. Since 1997 he has been primarily engaged in the
management of his personal investments in real properties, securities and other
investments. Mr. Lembke's legal practice was concentrated in the areas of
business and real estate transactions and taxation. He received a Bachelor of
Science degree from the University of Colorado in 1975, a Juris Doctor degree
from the University of Denver in 1979 and a Masters of Law degree in taxation
from the University of Denver in 1985. Mr. Lembke has been licensed to practice
law in Colorado since 1979. He has also been licensed as a Certified Public
Accountant in Colorado since 1979 and as a Real Estate Broker since 1987.
Norman A. Sheldon has been the President and owner of Sheldon & Associates
of Denver, Colorado since 1985. That firm is engaged in making and managing
investments in retail and commercial real properties, securities and other
investments. Prior to 1985 Mr. Sheldon had over 15 years experience in the real
estate industry and was primarily involved in the areas of acquisition of real
property for development or investment.
42
<PAGE>
Committees of the Board of Directors
The Board of Directors of the Company established an Audit Committee
constituting of Joel H. Farkas, and Robert A. Lembke and Norman A. Sheldon, the
independent directors. The Audit Committee will make recommendations for
selection of the Company's independent auditors, review the annual audit reports
of the Company and review audit and any non-audit fees paid to the Company's
independent auditors. See "EXPERTS". As indicated in the Prospectus section
captioned "RISK FACTORS", the Company has reserved 375,000 shares of its Common
Stock for possible issuance in connection with a Stock Option Plan which it
anticipates will be adopted subsequent to this offering. Such Plan, if adopted,
will be administered by the Compensation and Stock Committee consisting of Joel
H. Farkas, Robert A. Lembke and Norman A. Sheldon. This committee will also
oversee and make recommendations with respect to the compensation of the
Executive Officers and managerial and staff personnel of the Company. An
Executive Committee consisting of Messrs. Deutsch, Farkas and Messina has been
organized by the Board of Directors to act between meetings of the Board.
Executive Compensation
The compensation paid or accrued to the three directors and executive
officers of the Company by Gateway LLC during the year ended December 31, 1996
and the nine months ended September 30, 1997 is set forth in the table below.
None of this compensation was paid or accrued to the directors for their
services as such. All of this compensation was paid or accrued as annual
compensation and there was no long term compensation paid or accrued to any of
the officers.
<TABLE>
<CAPTION>
Name and Period Salary Payment of Prior Other
Principal Position Years Salaries Compensation
- ------------------ --------------- -------------------- --------------------- ----------------------
Paid Accrued Paid Accrued Paid Accrued
--------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Harvey E. Deutsch Year Ended 1996 $10,000 $110,000 $230,000 -0- $8,000 -0-
President and
Chief Executive 9 Months ended
Officer Sept. 30, 1997 $5,000 $85,000 -0- -0- $43,192 -0-
Joel H. Farkas, Year Ended 1996 -0- $108,000 $216,000 -0- $234,268(1) -0-
Vice-President-
Finance and Chief 9 Months ended
Financial Officer Sept. 30, 1997 -0- $81,000 -0- -0- $195,027(1) -0-
Michael A. Year Ended 1996 -0- $108,000 $26,212 -0- $22,000 -0-
Messina, Vice-
President of 9 Months ended
Development Sept. 30, 1997 -0- $81,000 -0- -0- $36,352 -0-
</TABLE>
(1) Pursuant to a consulting agreement with the Company dated January 15, 1996,
Mr. Farkas receives additional compensation for acquisition and financial
services in the amount of 1% of the loan amounts on financing obtained by him on
behalf of the Company. The Company and Mr. Farkas have agreed to terminate the
consulting agreement on the Effective Date.
The table set forth below reflects the compensation to be paid to Harvey E.
Deutsch in his capacity as President and Chief Executive Officer and to Joel H.
Farkas as Vice President and Chief Operating Officer and Michael A. Messina as
Vice President-Development. Other than Messrs. Deutsch, Messina and Farkas, no
other executive officer of the Company will receive compensation in an amount of
$100,000 or more during the fiscal year ending December 31, 1998. Mr. Deutsch
will devote not less than two-thirds of his time to his duties with the Company.
43
<PAGE>
Summary Compensation Table
--------------------------
Annual
Compensation
Name and Principal Position - Salary
- --------------------------- ------------
Harvey E. Deutsch $120,000
Joel H. Farkas 108,000
Michael A. Messina 108,000
Employment Agreements
The Company, as of the Effective Date, will assume and be bound by
employment agreements which have been entered into by the Company and each of
Messrs. Deutsch, Farkas and Messina. The employment agreements are all on
similar terms, except for salary rates as indicated above, and each provide: (a)
annual salaries at the respective rates specified in the table above; (b) for an
initial term through December 31, 2000; (c) for an automatic extension for an
additional one year term after the initial term unless terminated by either
party; (d) for health and disability insurance coverage at the Company's
expense; (e) for an automobile expense allowance of $750 per month; (f) for key
person insurance at Company expense in the face amount of $1,500,000 payable to
the Company; (g) for payment of an annual premium of $25,000 on additional life
insurance payable to a beneficiary designated by each officer; (h) for payment
of six-months salary in the event the agreement is terminated by the Company for
the disability of the officer; (i) for payment of three years of salary to the
decedent's estate in the event of death during the term of the agreement, or
termination of the agreement without cause (as defined in the agreement) by the
Company; (j) for the employee to devote the time required to carry out his
duties to the Company; (k) the recognition by the Company that each employee has
other business interests which will require portions of the employee's time and
some of which may compete with the Company; (l) for reimbursement of accountable
out-of-pocket expenses incurred in the performance of their duties; and (m) for
incentive compensation as may be determined by the Board of Director's
including, stock options, a retirement plan or bonuses. The determination of any
incentive compensation including bonuses is totally within the discretion of the
Board of Directors.
The employment agreements provide that on the Effective Date (also the
date the Company assumes the agreements), the Company will assume any unpaid
amounts due to the three officers thereunder. As of September 30, 1997, this
unpaid liability aggregated $573,000 which will be paid from proceeds of this
offering. See "USE OF PROCEEDS".
Director Compensation
The independent directors may be entitled to receive director fees for
their attendance at regular and special meetings of the Board of Directors of
the Company or committees thereof. The amount of such fees have not yet been
determined, but are not expected to exceed $750 per meeting attended. They may
also be compensated for any services rendered to the Company outside their
normal duties as directors. All directors will be reimbursed for their cash
expenses, including travel expenses, incurred in the performance of their
services. The directors may also participate in any stock incentive or stock
option programs developed by the Company. The Company will also endeavor to
provide health insurance to the independ ent directors.
44
<PAGE>
Key Personnel
Jeffrey K. Prager, is in charge of all financial reporting for the Company.
Mr. Prager has been a full time employee of the Company since June, 1995. He was
a part time employee of the Company from its inception in June, 1994 through
May, 1995. From August, 1983 to June, 1995, Mr. Prager operated a public
accounting firm which provided a full range of financial services for clients
engaged in small to medium size businesses. Mr. Prager is a Certified Public
Accountant and has held such designation since 1975. In addition to providing
traditional accounting services, Mr. Prager's firm also provided economic
analysis, real estate analysis, business planning and financing. Mr. Prager
served as corporate Controller for the Alpert Corporation during the period May,
1978 to November, 1991. During such time, the Alpert Corporation was one of the
largest privately owned home builders in the greater Denver, Colorado
metropolitan area. Mr. Prager graduated with a degree in economics from the
University of Colorado and did post-graduate work in accounting.
Mark R. Traver, is the Director of Development, which includes forward
planning, platting, engineering design, and overseeing field construction which
position he has held since April of 1997. Mr. Traver has been in the land
development industry since 1983, and began as a field superintendent for Talley
Corporation and eventually became Vice President of Land Development before
being transferred to Florida in the same capacity for Good Property Company in
1986. Mr. Traver graduated from Iowa State University with a degree in Landscape
Architecture. From 1992 to 1993 he worked for Richardson, Nagy,
Martin-Architects and Planners in Newport Beach, California as Project Director
for Master Planning and Community Development. From 1994 to 1997 he worked as
Director of Development for Continental Homes.
Geoffrey J. Phillips, is the manager of Gateway American Properties
Brokerage, LLC. (a Colorado limited liability company in which Messrs. Deutsch,
Farkas and Messina each own a 17.5% membership interest). Mr. Phillips has been
the broker for Gateway American Properties Brokerage, LLC since its inception in
September, 1994 and is also employed with Gateway LLC. He as been involved in
the residential/commercial real estate profession for 25 years and has spent ten
years managing his own real estate company. Mr. Phillips graduated with a B.A.
in economics from the University of Wisconsin. Mr. Phillips is responsible for
all the marketing of developed and undeveloped parcels for Gateway LLC. Mr.
Phillips maintains a continuing relationship with the builder communities and
coordinates the completion and delivery of lots to the end purchaser.
Indemnification
Under the Articles of Incorporation of the Company, officers and directors
of the Company, and former officers and directors, are entitled to
indemnification from the Company to the full extent permitted by law. The
Company's bylaws and the Colorado Business Corporation Act generally provide for
such indemnification for claims arising out of the acts or omissions of Company
directors and officers (and certain other persons) in their capacity as such and
undertaken in good faith and in a manner reasonably believed to be in, or not
opposed to, the best interests of the Company, and further specify the circum
stances under which such indemnification shall be available. The Company also
has entered into an Indemnification Agreement with Messrs. Deutsch, Farkas and
Messina pursuant to which the Company has agreed to indemnify these individuals
45
<PAGE>
from and against any liability, cost or expense incurred by them under any loan
or obligation obtained by or for the benefit of the Company, including their
guarantees of the Notes. Insofar as such provisions of the Articles of
Incorporation or Bylaws of the Company, the Colorado Business Corporation Act or
the Indemnification Agreement purport to protect any director or officer of the
Company from liability to the Company and its holders of Common Stock and
arising from the willful misfeasance, bad faith, gross negligence or reckless
disregard of such directors' or officers' duties of office, the Company has been
informed that, in the opinion of the Commission, such indemnification provisions
violate public policy as expressed in the Act and are therefore unenforceable.
Conflicts of Interests and Competition
As discussed in "PROSPECTUS SUMMARY", "RISK FACTORS", "BUSINESS", "CERTAIN
TRANSACTIONS", and "MANAGEMENT", Messrs. Deutsch, Farkas, and Messina, the
officers and three of the directors of the Company, are involved in several
situations which involve possible conflicts of interests between themselves and
the Company. They all have interests in entities which have conveyed and may
convey real property to the Company. For the 33 month period beginning January
1, 1995, 68% of the finished and semi-finished lots sold by the Company have
been sold to PrideMark, a home building company owned by Mr. Messina. It is
anticipated that the Company will continue to sell between one-third and
one-half of its platted, finished and semi-finished lots to PrideMark during the
next year. In addition, PrideMark Homes began direct competition with the
Company in 1992, when it began developing, platting and acquiring lots to serve
its own homebuilding needs.
Robert A. Lembke and Norman A. Sheldon, directors of the Company, have
investments and business interests in the real estate business in the Colorado
area. Mr. Lembke is presently involved in one entity engaged in developing and
selling lots to residential home builders, although it is not in an area which
directly competes with the Company. They hold interests in entities which may
convey real property to the Company.
Mr. Farkas has provided loan acquisition and financial consulting services
to Gateway LLC for which he has received a consulting fee equal to 1% of loans
acquired through his services.
The Company has and intends to continue to obtain legal services from a law
firm in which Mr. Deutsch is a shareholder and principal.
In recognition of the potential conflicts of interest, the Company has; (a)
reached an understanding with Messrs. Deutsch, Farkas and Messina that any real
estate purchased from them will be purchased at 10% below fair market value,
based upon independent expert appraisals and each such purchase must be approved
by the Company's two independent directors; (b) developed a property marketing
program designed to decrease the Company's dependence on PrideMark for lot
sales; (c) reached an agreement with Mr. Farkas to terminate his consulting
agreement on the Effective Date; and (d) reached an understanding with Mr.
Deutsch that he will have no further economic interest in any legal fees paid to
his firm for legal services performed after the Effective Date.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the Effective Date and as adjusted
to reflect: (i) the completion of the Transaction involving the requisition of
Gateway LLC; and (ii) the sale of the Common Stock offered hereby (assuming no
exercise of the Over-Allotment Option) by (a) each stockholder known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (b) each director of the Company, (c) each executive officer of the
Company as identified in this Prospectus, and (d) all executive officers and
directors as a group. Except as otherwise indicated, the Company believes that
the beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such Shares subject to community property laws
where applicable. The business address of each individual listed below is the
same as the address of the Company's principal executive offices in Denver,
Colorado.
46
<PAGE>
<TABLE>
<CAPTION>
Shares Owned Percentage of Percentage of
Beneficial as of the Beneficial Ownership Beneficial Ownership
Effective Date (1) before Offering(1) after Offering(1)
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Harvey E. Deutsch(2) 493,594 20.98% 12.81%
Joel H. Farkas(3) 493,594 20.98% 12.81%
Michael A. Messina 835,312 35.51% 21.68%
Officers & Directors 1,825,500 77.61% 47.39%
as a group (5 persons)
(1)
</TABLE>
- -------------
(1) The 1,822,500 shares owned by Messrs. Deutsch, Farkas and Messina along
with 202,500 shares owned by other members of Gateway LLC are deposited
under a Voting Trust Agreement described below. Under that Agreement, any
two of these three individuals can vote the entire 2,025,000 deposited
shares or 77.47% of the shares outstanding prior to the Offering and
52.57% afterwards.
(2) Of these Shares 330,075 are owned by family members or trusts for the
benefit of family members of Mr. Deutsch. Mr. Deutsch exercises voting
control over such Shares, as well as shared voting control with Messrs.
Farkas and Messina over 202,500 additional Shares owned by other members
of Gateway LLC, by virtue of the Voting Trust Agreement described in note
1 above and below.
(3) Of these Shares 149,344 are owned by a trust for the benefit of family
members of Mr. Farkas. Mr. Farkas exercised voting control over such
Shares, as well as shared voting control with Messrs. Deutsch and Messina
over 202,500 additional Shares owned by other members of Gateway LLC, by
virtue of the Voting Trust Agreement described in Note 1 above and below.
Messrs. Deutsch, Farkas and Messina have entered into a Voting Trust
Agreement pursuant to which, on and after the Effective Date, the shares of
Common Stock of the Company beneficially owned by them and members of their
respective families or family trusts will be voted by them as voting trustees
serving pursuant to such Agreement. Under the terms of the Voting Trust
Agreement, Messrs. Deutsch, Farkas and Messina have shared voting control (in
proportion to the percentage of Shares owned by each of them and their
respective family members and family trusts) over a total of 2,025,000 Shares
which includes 202,500 Shares owned by other members of Gateway LLC. The Voting
Trust Agreement has a term of ten years, and is renewable for an additional ten
year period. During its term, the Voting Trust Agreement can be terminated only
by agreement of the voting trustees. By virtue of its terms, the existence of
such Voting Trust Agreement is not expected to diminish the voting control of
the Company vested in Messrs. Deutsch, Farkas and Messina.
Messrs. Deutsch, Farkas and Messina, their family members and the trusts
for the benefit of their family members, as well as the other members of Gateway
LLC, also have entered into a Cross Purchase Agreement providing for the sale
and purchase of the Company's Common Stock among such persons and their
representatives.
UNDERWRITING
There are no underwriting arrangements with respect to the sales to be made
by the Selling Stockholders. It is anticipated that any such sales will be made
in the over-the-counter market under orders placed by each Selling Shareholder
with the selling registered broker-dealer.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.01 par value. As of December 1, 1997 the Company had
outstanding 327,000 shares of Common Stock held by 39 holders of record. Upon
consummation of this offering, there will be 3,852,000 shares of Common Stock
outstanding and if the Over-Allotment Option is utilized to its full extent,
there will be 4,077,000 shares of Common Stock outstanding.
47
<PAGE>
Common Stock
Holders of shares of the Common Stock are entitled to one vote per Share
on all matters to be voted upon by the stockholders. Cumulative voting is not
permitted in the election of directors. In summary, cumulative voting permits
the holders of voting securities to cumulate the vote attributable to such
securities by multiplying the number of Shares held times the number of
candidates standing for election to a corporation's board of directors and then
allocating the resulting number of votes among one or more of such candidates.
The absence of cumulative voting and the number of Shares beneficially owned by
the present directors and officers of the Company will vest voting control of
the Company in such persons. See "PRINCIPAL SHAREHOLDERS". The holders of shares
of Common Stock are entitled to receive ratably such dividends, if any, as may
be declared from time to time by the Board of Directors out of funds legally
available therefor. See "DIVIDEND POLICY".
In the event of liquidation, dissolution, or winding up of the Company,
the holders of shares of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. Shares of Common Stock have no
preemptive, conversion or other subscription rights and there are no redemption
or sinking fund provisions applicable to the Common Stock. All of the shares of
Common Stock sold in this offering will be fully paid and non-assessable.
Warrants
General. The Warrants offered hereby will be issued in registered form
pursuant to the terms of a warrant agreement (the "Warrant Agreement"), dated as
of the Effective Date, between the Company and American Securities Transfer
& Trust, Inc., as warrant agent (the "Warrant Agent"). An aggregate of 3,000,000
Warrants (up to 3,450,000 Warrants if the Over-Allotment option is exercised in
full) will be issued pursuant to the Warrant Agreement.
The following statements and summaries of certain provisions of the
Warrant Agreement are subject to the more detailed provisions of the Warrant
Agreement, copies of which may be examined at the principal offices of the
Warrant Agent and a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
Right to Purchase Shares of Common Stock. Each Warrant will entitle the
registered holder to purchase from the Company one share of Common Stock at an
exercise price of $4.50 per Share during the period commencing on the date of
this Prospectus and ending on the fifth anniversary of such date.
Exercise. Each holder of a Warrant may exercise such Warrant by
surrendering the certificate evidencing such Warrant, with the form of election
to purchase on the reverse side of such certificate properly completed and
executed, together with payment of the exercise price, to the Warrant Agent. No
Warrants may be exercised unless at the time of exercise there is a current
prospectus covering the shares of Common Stock issuable upon the exercise of
such Warrants under an effective registration statement. The Company is required
to maintain an effective registration statement, including such current
prospectus, so long as any of the exercisable Warrants remain outstanding. While
it is the Company's intention to comply with this obligation, there can be no
assurance that it will be able to do so. See "RISK FAC TORS".
The exercise price will be payable in cash or by certified or official
bank check payable to the Company. If fewer than all of the Warrants evidenced
by a warrant certificate are exercised, a new certificate will be issued for the
remaining number of Warrants. Certificates evidencing the Warrants may be
exchanged for new certificates of different denominations by presenting the
Warrant certificate at the office upon exercise of any Warrants and the number
of Warrants are subject to adjustment upon the occurrence of certain events,
including stock dividends, reclassifications, reorganizations, consolidations,
merger, and certain issuances and redemptions of Common Stock and securities
convertible into or exchangeable for Common Stock. No adjustment in the exercise
price will be required to be made with respect to the Warrants until cumulative
adjustments amount to $.05. In the event of any capital reorganization, certain
reclassification of the Common Stock, any consolidation or merger involving the
Company (other than a consolidation or merger which does not result in any
reclassification or change in the outstanding shares of Common Stock), or sale
of the properties and assets of the Company, as, or substantially as, an
entirety to any other corporations, Warrants will thereupon become exercisable
only for the number of shares of stock or other securities, assets, or cash to
which a holder of the number of shares of Common Stock of the Company
purchasable (at the time of such reorganization, reclassification,
consolidation, merger or sale) upon exercise of such Warrants would have ben
entitled upon such reorganization, reclassification, consolidation, merger or
sale.
Other Rights. In the event of an adjustment in the number of shares of
Common Stock issuable upon exercise of the Warrants, the Company will not be
required to issue fractional shares of Common Stock upon exercise of the
Warrants. In lieu of fractional shares of Common Stock, there will be paid to
the holder of the Warrants at the time of such exercise an amount in cash equal
to the same fraction of the current market value of a share of Common Stock of
the Company.
48
<PAGE>
Warrant holders do not have voting or any other rights of shareholders of
the Company and are not entitles to dividends, if any.
Redemption of Warrants. If the closing price of the Common Stock shall
have equaled or exceeded $6.40 per Share for a period of 30 consecutive trading
days at any time after the date of this Prospectus, the Company may redeem the
Warrants by paying holders $.35 per Warrant, provided that notice of such
redemption is mailed within ten days after the end of such period and prescribes
a redemp tion date at least 30 days thereafter. Warrant holders will be entitled
to exercise Warrants at any time up to the business day next preceding the
redemption date.
Modification of the Warrant Agreement. The Warrant Agreement contains
provisions permitting the Company and the Warrant Agent, without the consent of
the Warrant holders, to supplement or amend the Warrant Agreement in order to
cure any ambiguity or defect, or to make any other provision in regard to
matters or questions arising thereunder that the Company and the Warrant Agent
may deem necessary or desirable and that does not adversely affect the interests
of the Warrant holders.
Transfer Agent and Registrar and Warrant Agent
The Transfer Agent and Registrar and Warrant Agent for the Common Stock is
American Securities Transfer & Trust, Inc., Denver, Colorado.
Shares Eligible for Future Sale
Prior to this offering, there has been no public market for the Common
Stock or the Warrants. Sales of substantial amounts of shares of Common Stock in
the public market could adversely affect market prices of the Shares and make it
more difficult for the Company to sell equity securities in the future at a time
and price it deems appropriate. See "RISK FACTORS".
Upon completion of the offering, there will be 3,852,000 shares of Common
Stock outstanding excluding an aggregate of 4,125,000 shares issuable upon
exercise of; (i) the Warrants (3,000,000 Shares); (ii) the Over-Allotment Option
and the Warrants issuable thereunder (675,000 shares); (iii) the Founders'
Warrants (300,000 shares); (iv) the Representative's Warrants (450,000 shares);
and (v) shares possibly issuable under the Stock Option Plan which may be
adopted by the Company (a maximum of 375,000 Shares). Of these shares, the
1,500,000 shares sold in this offering, the 3,000,000 shares underlying the
Warrants, and the maximum of 675,000 shares issuable upon full exercise of the
Over-Allotment Option and the exercise of the Warrants issuable thereunder, will
be freely tradeable without restriction or further registration under the Act,
except for any such shares purchased by an "affiliate" of the Company, which
will be subject to the resale limitations of Rule 144 under the Act. As defined
in Rule 144, an affiliate of the issuer is a person who, directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, such issuer, and generally includes members of the Board of
Directors and senior management. Additionally, the 300,000 shares underlying the
Founders' Warrants and the 327,000 shares of the Company's Common Stock issued
prior to the Transaction, will also be registered under the Act. Of such 327,000
shares of Common Stock, 27,000 shares may not be sold for a period of 90 days
from the Effective Date. The remaining 300,000 outstanding shares and the
300,000 Shares issuable upon full exercise of the Founders' Warrants, while
registered under the Act, are subject to "lockup provisions" existing between
the holders thereof and the Representative which preclude their sale into the
market without the Representatives prior consent for 15 months from the
Effective Date.
49
<PAGE>
Of the 2,352,000 shares of Common Stock outstanding on the Effective Date,
the 2,025,000 Shares issued in the Transaction for the membership interests in
Gateway LLC, the 450,000 Shares issuable upon full exercise of the
Representative's Warrants, and the maximum of 375,000 Shares possibly issuable
upon any Stock Option Plan adopted by the Company are or will be "Restricted
Securities" as defined in Rule 144 under the Act ("Rule 144") (collectively the
"Restricted shares") and may not be sold without registration under the Act
unless pursuant to an applicable exemption therefrom. The 2,025,000 shares
issued in the Transaction are also subject to the "lock-up provisions" for the
15 months from the Effective Date. The Company has granted certain registration
rights with respect to the shares of Common stock underlying the
Representative's Warrants. In addition, the Company expects to register under
the Act at any appropriate time, the Shares reserved for issuance under any
Stock Option Plan adopted.
In general, Rule 144 allows a stockholder who has beneficially owned
Restricted Shares for at least one year to sell a number of Restricted Shares
within any three-month period that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock (approximately 38,520
Shares after giving effect to this offering) or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks immediately preceding
such sale. Sales under Rule 144 are also subject to certain requirements as to
the manner and notice of sale and the availability of public information about
the Company. A stockholder who is not an "affiliate" of the Company at any time
during the 90 days immediately preceding a sale, and who has beneficially owned
his Shares for at least two years (as computed under Rule 144) is entitled to
sell such Shares under Rule 144 without regard to the volume and manner of sale
limitations described above.
SELLING STOCKHOLDERS
The Selling Stockholders may from time to time sell or otherwise dispose
of such shares of Common Stock on their own behalf at market prices then
prevailing or otherwise at prices then available. None of these shares are being
sold in the offering which is being underwritten by the Underwriter, and the
Company will not receive any of the proceeds from the sale of these Selling
Stockholders Shares. The Company is paying all of the expenses of registration
of the Selling Stockholders Shares. Brokers' commissions, taxes and other
selling expenses are to be borne by the Selling Stockholders and are not
expected to exceed normal selling expenses. Sales of the Selling Stockholders
Shares will be subject to the prospectus delivery requirements and other
requirements of the Securities Act.
The Selling Stockholders may not sell 27,000 of their shares for 90 days
from the date of this Prospectus and the remaining 600,000 shares may not be
sold for 15 months from the date of this Prospectus without the Representative's
consent. Information with respect to the Selling Stockholders Shares and
Founders Warrants held by each is set forth below and assumes all the shares are
sold.
Number of Founders
Name of Investor Number of Shares Held (1) Warrants Held (1)
- ---------------- ------------------------- -----------------
Robert B. Abel 2,459 2,459
Anna S. Beeler Olthouse 6,000 6,000
Anna S. Olthouse & Larry J. West 614 614
Aime G. & Arietta N. Begin 614 614
Kenneth Benedict and
Wanda Benedict, JTWROS 1,229 1,229
James A. & Barbara A. Bird 737 737
Bizz Mark, Inc. 614 614
James E. Brassfield 5,532 5,532
Ben Boren 5,531 5,531
Robert M. Brodbeck 922 922
Marilyn S. Brown 2,459 2,459
Cynthia C. Butler 1,500 1,500
Lawrence Castle 1,500 1,500
Kent B. Connally 6,074 6,074
Corporate Communication
Network, Inc. 12,000 12,000
Randall J. Coyne 9,221 9,221
Marshall D. Davis, Esq. 15,291 15,291
Robert R. DeMaris 461 461
Paul DeMaris 461 461
Donna Dryman & Joe Stumbo,
as Trustees of the Alfred
G. DeMaris, Sr. Trust FBO
Alfred G. DeMaris, Jr. 461 461
Elmer L. & Judith A. Eagle 2,459 2,459
Geraldine C. Elliot (Cocciardi) 614 614
Richard L. Fisher 614 614
S & G Partnership 6,147 6,147
General Acceptance Corp. 7,377 7,377
Granite Laurel, Inc. S.A. 16,993 16,993
50
<PAGE>
Number of Founders
Name of Investor Number of Shares Held (1) Warrants Held (1)
- ---------------- ------------------------- -----------------
Kristen Graves 615 615
Karron Graves 615 615
Kia Graves 614 614
John P. Graves, Jr. 922 922
Gail M. Graves 922 922
Pamela J. Grier 1,229 1,229
Ralph H. Grills, Jr. 6,147 6,147
Barry J. Higgins 3,000 3,000
Sibert M. & Sharon L. Hill 3,000 3,000
Russell & Joyce M. Holzman 614 614
William T. Kirtley 9,221 9,221
William T. Kirtley, P.A.
Profit Sharing Plan
William T. Kirtley, Trustee 3,000 3,000
Ellen Lane 1,844 1,884
Joseph R. & Pauline A. Lariviere 614 614
Maurice L. Lariviere 9,221 9,221
Gabriel Lotan 3,000 3,000
Howard J. & Carmela V. Manetti 17,208 17,208
James T. McDonough 63,876 36,876
Clark Morton 614 614
Mari Morton 1,844 1,844
Margaret Mountain 12,291 12,291
Sam Newton 15,000 15,000
Robert M. Nieder 2,250 2,250
Allyson Palmer 4,500 4,500
George D. Phillips 1,844 1,844
Leonard A. Pluss 7,500 7,500
The Prager Irrevocable Trust 3,750 3,750
William Lee Pryor III 3,689 3,689
ROMED 3,000 3,000
G. Lawrence & Carolyn M. Schmidt 4,844 4,844
Willard D. Sheffield 1,844 1,844
Norman Sheldon 3,000 3,000
Theresa Shulman 5,533 5,533
Carroll V. SoRelle 5,533 5,533
Sheldon & Judith Spector 3,000 3,000
Mervin F. Stelter 1,229 1,229
Terry L. Stewart 614 614
Dianne Van Etten 461 461
H. E. "Bud" & Camille A. Van Orden 3,000 3,000
Veggo Larsen Hanifen Imhoff IRA 4,500 4,500
M. Rean Wegley 614 614
Jerry P. Youmans 3,000 3,000
----- -----
TOTAL 327,000 300,000
(1) Assumes that all shares offered are sold by the Selling Stockholders.
There are no current or future plans, proposals, arrangements or understandings
of the Representative or known to the Representative with respect to modifying,
shortening or waiving any of the described "lock-up provisions".
Information with respect to any position, office or other material
relationship which any Selling Stockholder has had with the Company or any of
its predecessors or affiliates is as follows: (a) James T. McDonough was an
officer and director of Apollo and Gateway American-Florida and the holder of
19.5% of the outstanding stock of Gateway American-Florida; (b) William T.
Kirtley was an officer and director of Apollo and Gateway American-Florida; (c)
Randall J. Coyne, Robert B. Abel and W. Lee Pryor III were directors of Apollo;
(d) Granite Laurel, Inc. S.A. and Howard J. and Carmella Manelli each old over
5% of the outstanding stock of Gateway American-Florida; and (e) Norman Sheldon
is a director of the Company.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock and Warrants
offered hereby are being passed upon for the Company by William T. Kirtley,
P.A., Sarasota, Florida and Gilbert L. McSwain, Esq., Denver, Colorado. Certain
legal matters will be passed upon for the Underwriters by David A. Carter, P.A.,
Boca Raton, Florida,
51
<PAGE>
EXPERTS
The consolidated financial statements of Gateway LLC as of December 31,
1996, and for each of the years in the two-year period ended December 31, 1996,
and the balance sheet of Gateway American Properties Corporation (a Colorado
Corporation), included in this Registration Statement have been audited by
Gelfond Hochstadt Pangburn & Co., independent certified public accountants,
Denver, Colorado, as stated in their reports appearing herein, and are included
in reliance upon the reports of such firm, given upon their authority as experts
in accounting and auditing.
The financial statements of Gateway American Properties Corporation (a
Florida Corporation) as of December 31, 1995 and 1996, and for the period from
January 12, 1995 (date of inception) to December 31, 1995, and for the year
ended December 31, 1996, included in this Registration Statement have been
audited by Beatty & Company, P.A., independent certified public accountants,
Sarasota, Florida, as stated in their report appearing herein, and are included
in reliance upon the report of such firm, given upon their authority as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933 with respect to the Securities, among other
securities. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the Rules and Regulations of the Commission. For further information with
respect to the Company and this Offering, reference is made to the Registration
Statement, including the exhibits filed therewith, which may be examined at the
Commission's principal office, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549; the Northeast Regional Office of the Commission at
7 World Trade Center, Suite 1300, New York, New York 10048; and the Midwest
Regional Office of the Commission, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, where copies may be obtained upon payment
of the fees prescribed by the Commission, Such documents may also be obtained
through the website maintained by the Commission at http://www.sec.gov.
Descriptions contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are not
necessarily complete and each such description is qualified by reference to such
contract or document. The Company will provide without charge to each person who
receives a Prospectus, upon written or oral request of such person to the
Company at the following address or telephone number, a copy of any of the
information that is incorporated by reference in this Prospectus: 9145 East
Kenyon Avenue, Suite 200, Denver, Colorado 80237, Attention: Joel H. Farkas,
telephone (303)843-9742.
52
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION,
a Colorado Corporation
INDEX TO FINANCIAL STATEMENTS
GATEWAY AMERICAN PROPERTIES, LLC,
Page
Independent Auditors' Report..........................................F-3
Consolidated Balance Sheets...........................................F-4
Consolidated Statements of Income.....................................F-5
Consolidated Statements of Members' Equity............................F-6
Consolidated Statements of Cash Flows.................................F-7
Notes to Consolidated Financial Statements............................F-9
GATEWAY AMERICAN PROPERTIES CORPORATION,
(a Colorado Corporation)
Independent Auditors' Report.........................................F-24
Balance Sheet........................................................F-25
Note to Balance Sheet................................................F-26
GATEWAY AMERICAN PROPERTIES CORPORATION,
(a Florida Corporation)
Report of Independent Certified Public Accountant....................F-28
Balance Sheet........................................................F-30
Statement of Operations..............................................F-31
Statement of Shareholder's Equity....................................F-32
Statement of Cash Flows..............................................F-33
Notes to Financial Statements........................................F-34
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
GATEWAY AMERICAN PROPERTIES CORPORATION (Colorado)
GATEWAY AMERICAN PROPERTIES, LLC and
GATEWAY AMERICAN PROPERTIES CORPORATION (Florida)
Introduction...................................................F-38
Pro forma Condensed Balance Sheet..............................F-39
Pro forma Condensed Statements of Operations...................F-40
Notes to Pro forma Condensed Financial Statements..............F-42
F-1
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Gateway American Properties, LLC
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Gateway American
Properties, LLC and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, members' equity and cash flows for each of
the years in the two year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gateway American
Properties, LLC and subsidiaries as of December 31, 1996, the results of their
operations, and their cash flows for each of the years in the two year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
September 22, 1997
F-3
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
1996 1997
----------- ------------
(Unaudited)
Cash $ 133,523 $ 19,290
Restricted cash 534,729
Accounts receivable 69,709 58,750
Accounts receivable, related party 84,650 570,527
Deposits 62,700 72,500
Land under development 16,081,225 21,543,952
Due from metro and
general improvement districts (Note 2):
Related parties 1,415,593 1,432,060
Other 161,038 161,638
Loan fees, net of amortization of $520,408 and
$657,366 in 1996 and 1997, respectively 364,420 227,462
Deferred offering costs 80,595
Other assets 28,819 34,279
----------- -----------
Total assets $18,936,406 $24,201,053
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Accounts payable $ 860,650 $ 923,633
Accounts payable, related parties (Note 5) 1,011,754 802,516
Property taxes payable 77,563 58,200
Customer deposits (Note 4) 236,000 338,500
Notes payable (Note 3):
Private placements 5,500,000 4,000,000
Banks 4,858,817 12,225,169
Related parties 1,047,433 2,500,219
Other 4,782,945 2,395,269
----------- -----------
Total notes payable 16,189,195 21,120,657
----------- -----------
Total liabilities 18,375,162 23,243,506
----------- -----------
Commitments and contingencies (Notes 2, 4, 5, and 6)
Minority interest 156,946 111,403
Members' equity 404,298 846,144
----------- -----------
Total liabilities and members' equity $18,936,406 $24,201,053
=========== ===========
See notes to consolidated financial statements.
F-4
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF INCOME
Year ended Nine months ended
December 31, September 30,
1995 1996 1996 1997
---------------------------------------------------
(Unaudited) (Unaudited)
Sales:
Related party (Note 5) $2,800,535 $ 7,901,928 $4,531,383 $4,485,601
Other 1,574,824 2,598,678 2,304,962 2,260,944
---------- ---------- ---------- ---------
4,375,359 10,500,606 6,836,345 6,746,545
Cost of sales (Note 5) 3,747,285 9,549,080 6,077,747 5,353,431
---------- ---------- ---------- ---------
628,074 951,526 758,598 1,393,114
General and
administrative expenses 589,905 791,522 534,402 791,076
---------- ---------- ---------- ---------
Operating income 38,169 160,004 224,196 602,038
Interest income (expense) 10,728 1,450 (33,480) (3,357)
---------- ---------- ---------- ---------
Income before
minority interest 48,897 161,454 190,716 598,681
Minority interest in
income of
consolidated
joint ventures 39,149 52,010 19,299 75,335
---------- ---------- ---------- ---------
Net income $ 9,748 $ 109,444 $ 171,417 $ 523,346
========== ========== ========== =========
See notes to consolidated financial statements.
F-5
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
Total
Member Member Accumulated members'
contributions distributions earnings equity
------------- ------------- ----------- --------
Balance, January 1, 1995 $296,074 $(113,792) $67,158 $249,440
Contributions from members 30,500 30,500
Net income 9,748 9,748
------- -------- ------- -------
Balance, December 31, 1995 326,574 (113,792) 76,906 289,688
Contributions from members 5,166 5,166
Net income 109,444 109,444
------- -------- ------- -------
Balance, December 31, 1996 331,740 (113,792) 186,350 404,298
Distributions to members
(unaudited) (81,500) (81,500)
Net income for the nine
months ended September 30,
1997 (unaudited) 523,346 523,346
------- -------- ------- -------
Balance, September 30,
1997 (unaudited) $331,740 $(195,292) $709,696 $846,144
======= ======== ======= =======
See notes to consolidated financial statements.
F-6
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended Nine months ended
December 31, September 30,
1995 1996 1996 1997
------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,748 $109,444 $ 171,417 $523,346
---------- ---------- ---------- ----------
Adjustments to reconcile
net income to net cash
used in operating activities:
Depreciation 4,551 6,496 4,872 3,836
Amortization 232,618 266,909 196,649 127,662
Minority interest in income
of consolidated joint ventures 39,149 52,010 19,299 75,335
Changes in operating assets
and liabilities:
Restricted cash 1,979,079 (181,304) 203,879 534,729
Accounts receivable (258,123) 125,941 (49,487) (474,918)
Deposits (62,700) (50,000) (9,800)
Land under development (6,341,433) (3,896,108) (2,982,980) (5,462,727)
Due from metro and general
improvement districts (503,806) (1,072,825) (766,615) (17,067)
Loan fees (210,354) (370,491) (357,379)
Other assets (27,693) 108,339 108,039
Accounts payable 866,859 611,820 (468,028) (146,255)
Property taxes payable 81,873 (27,437) (71,347) (19,363)
Customer deposits 86,313 (73,333) (49,999) 102,500
---------- ---------- ---------- ----------
Net cash flows used
in operating activities (4,041,219) (4,403,239) (4,091,680) (4,762,722)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Distributions to minority
interest (12,040) (59,667) (34,667) (120,878)
---------- ---------- ---------- ----------
Net cash flows
used in investing activities (12,040) (59,667) (34,667) (120,878)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Deferred offering costs (80,595)
Issuance of notes payable 6,599,343 19,456,461 17,121,666 12,804,180
Payments of notes payable (2,781,389) (14,867,850)(12,759,026) (7,872,718)
Contributions from members 30,500 5,166 175
Distributions to members (81,500)
---------- ---------- ---------- ----------
Net cash flows provided
by financing activities 3,848,454 4,593,777 4,362,815 4,769,367
---------- ---------- ---------- ----------
Net increase (decrease) in cash (204,805) 130,871 236,468 (114,233)
Cash beginning 207,457 2,652 2,652 133,523
---------- ---------- ---------- ----------
Cash ending $ 2,652 $133,523 $ 239,120 $19,290
========== ========== ========== ==========
</TABLE>
(Continued)
F-7
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years ended Nine months ended
December 31, September 30,
1995 1996 1996 1997
-----------------------------------------------
(Unaudited)(Unaudited)
<S> <C> <C> <C> <C>
Supplemental disclosure of
cash flows information:
Cash paid during the
period for interest $ 1,062,285 $ 2,261,129 $ 1,753,000 $ 1,665,000
========== ========== ========== ==========
Disclosure of noncash
financing activities:
During 1996, the Company
assumed indebtedness of
members totaling $433,212
related to development costs
they had incurred which has
been included as costs of
land under development (Note 5).
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies:
a. Capitalization and organization of the limited liability company:
Gateway American Properties LLC (Gateway LLC or the Company) was formed in
June 1994 for the purpose of acquiring, zoning, platting, and developing
real property for residential use, into lots available for sale to
homebuilders. In certain subdivisions, the Company also constructs homes
or other buildings on properties it has developed instead of selling the
improved lots to other homebuilders. Land under development is
concentrated in the greater Denver metropolitan area and in Fort Collins,
Colorado. The builders may construct single family detached homes or
multifamily attached town homes. The Company also plans to purchase other
real estate; complete the annexation, zoning, platting and infrastructure;
and sell the properties in bulk as platted, or as separate finished lots.
The Company may also engage in the development of commercial properties.
As more fully described in the accompanying notes, a substantial portion of
the land acquisition and sales transactions is with related parties.
Effective December 1994, the Company acquired a 50% ownership in the Land
Investors Acquisition Fund (LIAF), a Colorado limited liability company
formed in March 1994. The 50% membership interest in LIAF was acquired
from the Company's three principal members, one of whom is also a 93%
owner of Richland Development Company, LLC (RDC) and PrideMark, a
significant customer of the Company. The Company paid an amount equal to
50% of the net historical book value of LIAF. Since the Company's
principal members have exercised significant control over LIAF, the
accounts of LIAF have been consolidated with accounts of the Company since
the inception of LIAF.
Effective May 31, 1995, the Company acquired the remaining 50% interest in
LIAF for $235,000, consisting of cash and notes payable, from unrelated
third parties. The acquisition has been accounted for as a purchase and
the assets and liabilities have been recorded at fair value which
approximated historical costs.
F-9
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
a. Capitalization and organization of the limited liability company
(continued):
During 1995, the Company formed Rampart Townhomes at Roxborough, LLC in
which the Company retained a 61.66% interest. In addition, during 1995 the
Company formed Townhomes at Quail Run, LLC in which the Company retained
a 75% interest. Both LLC's have been consolidated in the accompanying
financial statements and the results of their operations have been
included in the financial statements since acquisition. Both entities are
in the business of developing land for sale to homebuilders.
Effective July 31, 1996, the Company acquired a 100% interest in Sterling
Hills, Ltd. for $645,869 of which $354,546 was paid to related parties,
$63,782 was paid to a party related to the underwriter of the Company's
private placements and the remaining amount was paid to unrelated third
parties. Sterling Hills, Ltd. was merged into Gateway American Properties,
LLC as of July 31, 1996. The results of its operations have been included
in the financial statements since acquisition.
During 1996, the Company formed a new subsidiary, Willow Run Properties,
LLC, in which the Company owns 99.999%, with the remaining .001% owned by
a member of the Company.
All significant intercompany accounts and transactions have been
eliminated.
b. Limited Liability Company (LLC):
An LLC is an unincorporated association of one or more persons whose
members have limited personal liability for the obligations or debts of
the entity. For federal income tax purposes, the Company is classified as
a partnership.
F-10
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
c. Revenue and cost recognition:
Revenue and profit are recognized at the time a sale is closed, ownership
is transferred to the buyer, and the Company is not obligated to perform
significant activities subsequent to the closing date. Capitalized costs
are charged to cost of sales upon closing. Consideration received by the
Company for sales is generally cash.
During development, all direct material and labor costs and those indirect
costs related to acquisition and development are capitalized. Costs
incurred in connection with completed lots are expensed as incurred.
Provisions for estimated losses on uncompleted development projects are
recorded in the period in which such losses are determined. All customer
deposits are recorded as liabilities until the sale is completed.
d. Cash equivalents:
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less when purchased to be cash equivalents.
e. Restricted cash:
Restricted cash represents funds held in escrow accounts with a bank for
certain designated purposes in connection with the Company's issuance of
12% secured promissory notes with a balance of $5,500,000 at December 31,
1996 ($4,000,000 at September 30, 1997 (unaudited)) (see Note 3). These
escrow accounts include funds designated for acquisition of the
properties, development of the lots, and payment of interest on the note.
Additionally, all proceeds from sales of finished lots are deposited in
the escrow account to be used for development of additional lots unless
and until funds held in the escrow account are considered sufficient to
cover development costs for all lots pledged as collateral on the note. At
September 30, 1997, all restricted cash had been disbursed in accordance
with the terms of the promissory notes (unaudited).
F-11
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
f. Due from metro and general improvement districts:
Amounts due from metro and general improvement districts consist of costs
incurred by the Company on behalf of certain districts in order to begin
the construction of necessary infrastructure items while the districts are
being established and the houses in the corresponding areas are being
sold. Although the Company has not incurred any losses from the districts,
the collectibility of such advances is dependent on the related
districts' ability to successfully raise sufficient funds in order to
complete the construction of the infrastructure and reimburse the costs of
the Company which may take up to nine years. Management anticipates that
all advances will be collected from the metro general improvement
districts: however, any advances determined to be uncollectible will be
charged to operations.
As of December 31, 1996 and September 30, 1997 (unaudited), included in due
from metro and general improvement districts on the accompanying balance
sheets are $1,415,593 and $1,432,060, respectively, from metro districts
of which three members of the Company comprise the board of directors (see
Note 2).
g. Land under development:
Land under development represents inventory consisting principally of lots
which the Company is zoning, platting, and readying for housing
construction. Inventories are stated at the lower of cost or net
realizable value. On a quarterly and annual basis, the Company assesses
costs allocated to each parcel of land to evaluate net realizable values.
Costs of inventory include all land acquisition costs, studies, site
development, surveys, direct costs of land development, and indirect
costs including financing and other carrying costs incurred
during the period of development. Development costs are allocated to
specific parcels of land.
The Company is developing several projects which it is selling pursuant to
specific performance contracts and option contracts with related and
unrelated parties. Most contracts provide for price escalations based on
the date of closing. These projects are in various stages of development
and will require additional costs before the projects will be completed
and be available for sale. The Company seeks to maintain purchase option
contracts for real estate properties covering a four to seven year supply
of lots, based upon current lot absorption information. In certain
instances, management believes it may take up to nine years to totally
complete development of certain major projects. At September 30, 1997
(unaudited) platted lots totaled approximately $10,475,000 and lots under
development totaled approximately $11,069,000.
F-12
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
h. Capitalization of interest:
The Company capitalizes interest on land under development during the
period of development and includes such costs as cost of sales when the
related real estate is sold. During the years ended December 31, 1995 and
1996, the Company incurred and capitalized interest of $1,062,285 and
$2,261,129, respectively, of which $3,320 and $63,540 was incurred to
related parties.
During the nine month periods ended September 30, 1996 and 1997, the
Company incurred and capitalized interest of approximately $1,753,000 and
$1,665,000, respectively, of which $47,637 and $103,884 was incurred to
related parties (unaudited). At September 30, 1997 land under development
included net capitalized interest of $1,386,154 (unaudited).
i. Loan fees:
Loan fees relating to the private placement notes payable are capitalized
and amortized over the life of the respective loans.
j. Income taxes:
No provision for income taxes has been provided since the members report
their distributive shares of income and deductions of the limited
liability company in their personal capacities, pursuant to election under
Subchapter K of the Internal Revenue Code.
k. Fair value of financial instruments:
The Company's financial instruments consist of cash, accounts receivable,
due from general improvement districts, accounts payable and notes
payable. The carrying value of cash and accounts receivable approximates
fair value due to their short-term nature. Amounts due to non-related
parties, including accounts payable and notes payable approximate fair
value due to their short-term nature and recently negotiated interest
rates, many of which are floating rates.
Notes payable related parties as shown in Note 3, are interest bearing and
due at various dates through September 30, 1999.
Amounts due from general improvement districts are recorded at the amounts
receivable at the balance sheet date; however, the amounts will be paid to
the Company as development infrastructure is completed and billed to
homeowners, which may be over a period of years. As discussed in Note 2,
a portion of these receivables bear interest at 8% payable semi-annually
and the balance of the receivables are non interest bearing. Due to the
indefinite timetable for repayment of these receivables it is not
practicable to estimate their fair value.
Other receivables from and payables to related parties are recorded at the
amounts due at the balance sheet date, and arise from related party
transactions discussed in Note 5. These receivables and payables are all
non interest bearing and are due on demand. However, fair value of these
amounts is not practicable to estimate because the underlying transactions
were not carried out on an arm's-length basis.
F-13
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. Nature of business and summary of accounting policies (continued):
l. 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
m. Reclassifications:
Certain amounts reported in the 1995 financial statements have been
reclassified to conform to classifications in the 1996 financial
statements.
n. Interim financial statements (unaudited):
The financial statements as of September 30, 1997, and for the nine months
ended September 30, 1996 and 1997, are unaudited. However, in the opinion
of the Company's management, the interim financial statements contain all
adjustments, including normal recurring adjustments, necessary for a fair
presentation of the Company's financial position, results of operations,
and cash flows.
2. Due from metro and general improvement districts:
Included in "Due from metro and general improvement districts" are limited
tax bonds which the Company received in 1995 from a metro district as
payment for costs incurred by the Company on behalf of the metro district
for the construction of certain infrastructure items. The bonds bear
interest at 8% which is payable on a semiannual basis. The bonds will
mature at a rate of $5,000 per year beginning December 1, 1996, with the
remaining amount of $320,330 due on December 1, 2005. As of December 31,
1996 and September 30, 1997 (unaudited), the Company had $337,768 recorded
in due from metro and general improvement districts on the accompanying
balance sheets related to this metro district.
F-14
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
3. Notes payable:
The Company has notes payable as follows:
December 31, September 30,
1996 1997
----------- ------------
(Unaudited)
Notes payable, private placement, due
September 30, 1999, payments in eight
equal installments of $500,000 beginning
December 31, 1997, and each three months
thereafter, interest at 12% payable
monthly, collateralized by deed of trust
on various parcels of real property
and guaranteed by certain members of
the Company $ 4,000,000 $ 4,000,000
Notes payable, private placement, due
April 30, 1997, payments in two equal
installments of $1,500,000 on April 30,
1996 and 1997, interest at 12% payable
monthly, collateralized by deed of trust
on various parcels of real property and
guaranteed by certain members of the
Company 1,500,000
Notes payable, bank, due from February 5,
1998 through March 1, 1999, interest
at 1% to 2% above prime rate with either
quarterly payments or due at maturity,
collateralized by deeds of trust on
various parcels of real property 1,724,037 9,656,830
F-15
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
3. Notes payable (continued):
December 31, September 30,
1996 1997
----------- ------------
(Unaudited)
Notes payable, bank, due from January 1,
1998 through June 30, 1998, interest
at 1.5% above prime, payable monthly,
collateralized by deeds of trust on
various parcels of real property 2,156,476 2,478,339
Notes payable, bank, under a line of
credit, due March 19, 1998, interest
at 1.5% above prime, collateralized
by deeds of trust on various parcels
of real property 78,500 90,000
Notes payable, bank, due from March 29,
1997 through June 1, 1997, interest at
12% (or 4% over bank rate, whichever
is greater), payable monthly,
collateralized by various parcels
of real property and guaranteed by
certain members of the Company 899,804
Notes payable, related parties, due
from June 15, 1998 through September 30,
1999, interest at 6% to 10% payable
monthly or quarterly, uncollateralized 897,433 683,930
Note payable, related party, due from
January 1, 1998 through January 1, 1999,
interest at .75% above prime payable
monthly, collateralized by deed of trust
on various parcels of real property 150,000 1,816,289
F-16
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
3. Notes payable (continued):
December 31, September 30,
1996 1997
----------- ------------
(Unaudited)
Notes payable, other, due November 1,
1997 through March 9, 2004, interest
at 8% to 15%, payable monthly or
quarterly, collateralized by deeds
of trust on various parcels of real
property 2,864,449 2,184,574
Notes payable, other, due through
June 15, 1998, interest at 8.5% to 15%,
payable quarterly or deferred until
maturity, uncollateralized 1,918,496 210,695
---------- -----------
$16,189,195 $21,120,657
=========== ===========
Notes payable, private placements provide financing for land acquisition
and development projects. The terms of the private placements require the
Company to maintain certain loan to collateral value ratios and cash
reserves (see Note 1). Notes payable, related parties, are payable to
members, their related companies, and affiliates.
Aggregate maturities for notes payable outstanding at September 30, 1997
(unaudited) are as follows:
1997 $ 2,752,310
1998 13,239,296
1999 3,389,539
2000 0
2001 0
Thereafter 1,739,512
------------
Total notes payable $ 21,120,657
============
F-17
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
4. Option contracts:
The Company has entered into option contracts with unrelated entities to
sell properties which it is developing into lots available for sale to
homebuilders. At December 31, 1996, the Company has committed to sell 119
remaining lots to these parties upon completion of development activity
for a total sales price of $2,971,250 (451 lots at a total sales price of
$11,682,800 at September 30, 1997 (unaudited)). These option contracts
generally include escalation clauses at various rates. Based on costs
incurred through December 31, 1996 (and September 30, 1997 (unaudited)),
and management's estimate of costs to complete the development, the
Company does not anticipate incurring any losses resulting from these
option contracts. Sales to one of these entities in 1996 comprised
approximately 16% of total sales.
At December 31, 1996, the Company has received $236,000 ($338,500 at
September 30, 1997, (unaudited)) as option deposits to be applied against
the lots available for sale.
In June 1997, the Company received $100,000 under an installment land
contract to sell a 10% undivided interest in a land parcel. Under the
agreement, the Company may be required to repurchase the parcel at its
fair market value over the next four years, with agreed upon minimum
appreciation. Consequently, the amount received is recorded as a liability
and the minimum appreciation (or increase in fair market value, if
greater) will accrete over four years (unaudited).
5. Related party transactions:
a. Related party land purchases:
During 1996, the Company and its subsidiaries purchased unimproved land at
a cost of approximately $1,995,000 from affiliated entities. Upon
purchase, the cost of the land is included in land under development.
During 1995, the Company purchased unimproved land from affiliates with a
cost of approximately $2,220,000. During the nine months ended September
30, 1997, the Company acquired no additional land from affiliated entities
(unaudited).
F-18
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
5. Related party transactions (continued):
b. Related party lot sales:
During 1995 and 1996, the Company sold improved lots to an affiliate
which is owned by a member and manager of the Company for cash of
$2,800,535 and $7,809,928 ($5,132,208 and $3,960,111 for the nine
months periods ended September 30, 1996 and 1997 (unaudited),
respectively). At December 31, 1996, pursuant to specific performance
contracts, the Company has committed to sell 556 lots to the affiliate
upon completion of the development process for $11,488,350 (79 lots
for $2,084,200 at September 30, 1997 (unaudited)). During the nine months
ended September 30, 1997 (unaudited), the affiliate released the Company
from the majority of the specific performance contracts. The improved
lots underlying these contracts were subsequently included in option
contracts with unrelated third parties (Note 4). The option contracts
generally include escalation clauses at various rates. Based on costs
incurred through September 30, 1997, and management's estimate of costs to
complete the development, the Company does not anticipate incurring any
losses resulting from these contracts. In 1996, an additional $92,000
($525,490 during the nine months ended September 30, 1997 (unaudited))
of lot sales were made to an entity which is one-third owned by a member
of the Company. The Company has commitments to sell this entity 15 lots
for $397,500 at September 30, 1997 (unaudited).
c. Indemnification agreement:
During 1995, the Company entered into an indemnification agreement whereby
the Company indemnifies the three principal members from any liability or
expense incurred by the members under loans obtained for the benefit of
the Company for which the members provided personal guarantees.
d. Legal fees:
Three members of the Company are attorneys in a law firm which provided
significant legal services to the Company, primarily pertaining to zoning,
platting and other related services in connection with developing real
estate. Approximately $680,000 of related party legal fees were incurred
by the Company in 1995, $470,000 in 1996, $399,744 (unaudited) and
$137,862 (unaudited) for the nine months ended September 30, 1996 and
1997, respectively. At December 31, 1996, there were outstanding legal
bills due the law firm of $433,568 ($392,597 at September 30, 1997
(unaudited)).
F-19
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
5. Related party transactions (continued):
d. Legal fees (continued):
The Company has agreements with the law firm for legal fees related to
specific projects to be developed by the Company. These fees are
contingent on the completion of zoning and platting of some or all the
parcels involved. The fees incurred for such contingent legal work is
approximately $164,000 at December 31, 1996 ($185,000 at September 30,
1997 (unaudited)). However, these fees have not been billed by the law
firm and are not recorded in these financial statements.
e. Office lease:
The Company is leasing its office space under a noncancellable operating
lease expiring September 30, 1997, from an entity controlled by a member
of the Company. Rent expense under the lease for 1995 and 1996 was $43,364
and $45,852 ($30,836 and $ 54,683 for the nine months ended September 30,
1996 and 1997 (unaudited)), respectively. The future minimum rental
commitment under this lease at December 31, 1996 is $27,972, all of which
is due in 1997.
In June 1997, the Company renewed the lease for a three year period
beginning October 31, 1997. Under the terms of the new agreement, the
Company is to pay $5,773 per month for the first year with escalation
clauses in years two and three. The Company also has an agreement with the
related party law firm, whereby the law firm will reimburse the Company
$1,325 per month for office space occupied by the law firm (unaudited).
Minimum future rental commitments under this lease at September 30, 1997
are as follows (unaudited):
Three months ended December 31, 1997 $ 17,319
Year ended December 31, 1998 70,029
Year ended December 31, 1999 73,041
Year ended December 31, 2000 56,475
F-20
<PAGE>
GATEWAY AMERICAN PROPERTIES, LLC
(A COLORADO LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
5. Related party transactions (continued):
f. Other related party transactions:
During 1995, the Company entered into employment agreements with three
members of the Company to pay them aggregate annual compensation of
$336,000 per year beginning July 1, 1994. In 1996, compensation to the
three members totaled $1,052,591, of which $293,379 was paid to or on
behalf of the members, $433,212 was paid through the assumption by the
Company of indebtedness of the managers related to development costs they
had incurred on behalf of the Company, and $326,000 has been accrued at
December 31, 1996. During the nine months ended September 30, 1996 and
1997, compensation to the three members was $417,400 and $533,822,
(unaudited) respectively; $578,000 remains unpaid at September 30, 1997
(unaudited). In addition, $183,500 was paid in 1996 as consulting fees
to entities controlled by the members.
During the nine months ended September 30, 1996 and 1997, consulting fees
paid to affiliates were $55,500 and $28,904 (unaudited), respectively.
6. Proposed public offering:
In January 1997, the Company was party to an agreement whereby the Company
would acquire a controlling interest in Gateway American Properties
Corporation (GAPC) (a reverse acquisition). According to the agreement,
the members of the Company are to contribute their ownership interest in
the Company to GAPC in return for 2,025,000 shares of GAPC common stock,
out of a total outstanding common stock of 2,352,000 shares. The exchange
is to be effective contemporaneous with the closing of a proposed public
offering. The 327,000 shares of common stock not owned by the members of
the Company will be registered contemporaneous with the shares offered in
the proposed public offering.
The proposed offering will sell 1,500,000 shares of common stock of GAPC to
the public at $4.00 per share and 3,000,000 warrants at $.1875 per
warrant, with each warrant exercisable to acquire a share of common stock
at $4.50 per share for a period of three years. The underwriter for the
proposed public offering is to receive a commission equal to ten percent
of the proceeds of the public offering plus a three percent
non-accountable expense allowance. In addition, GAPC has agreed to engage
the underwriter as a financial advisor for three years at a total fee of
$108,000, payable at the closing of the public offering. The underwriter
will also receive warrants to purchase 150,000 shares of common stock at
$6.00 per share during the five-year period commencing on the date of the
offering and warrants to purchase for $.28125 per warrant additional
warrants to purchase up to 300,000 shares of common stock exercisable at
$6.00 per share during the three-year period commencing on the date of the
offering.
F-21
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION
(A COLORADO CORPORATION)
SEPTEMBER 30,1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Gateway American Properties Corporation
Denver, Colorado
We have audited the balance sheet of Gateway American Properties Corporation as
of September 30, 1997. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Gateway American Properties
Corporation as of September 30, 1997, in conformity with generally accepted
accounting principles.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
November 19, 1997
F-23
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION
(A COLORADO CORPORATION)
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
Assets $ 100
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ NONE
===================
Shareholders' equity:
Common stock, $0.01 par value;
authorized 20,000,000 shares;
Issued and outstanding 100 shares 1
Additional paid-in capital 99
-------------------
Total liabilities and shareholders' equity $ 100
===================
See note to balance sheet.
F-24
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION
(A COLORADO CORPORATION)
NOTE TO BALANCE SHEET
SEPTEMBER 30, 1997
1. Organization and nature of business:
Gateway American Properties Corporation (the "Company") was incorporated
in March 1997 for the purpose of acquiring all of the assets of Gateway
American Properties Corporation - Florida (GAPC-F), in exchange for
327,000 shares of the Company's common stock. In addition, the Company
is party to an agreement whereby the Company is to acquire Gateway
American Properties, LLC (Gateway LLC) subsequent to its acquisition of
GAPC-F, and contemporaneous with the closing of a proposed public
offering of the Company's stock. According to the agreement, the members
of Gateway LLC are to contribute their ownership interest in Gateway LLC
in return for 2,025,000 shares of the Company's common stock.
Gateway LLC was formed in June 1994 for the purpose of acquiring, zoning,
platting, and developing real estate for residential use, into lots
available for sale to homebuilders. In certain subdivisions, the Company
also constructs homes or other buildings on properties it has developed
instead of selling the improved lots to other homebuilders.
GAPC-F is a development stage company incorporated in Florida which has
not had any significant operations.
The Company has entered into a letter of intent with an underwriter for a
public offering of its stock, whereby the Company will sell 1,500,000
shares of common stock to the public at $4.00 per share, and 3,000,000
warrants at $.1875 per warrant, with each warrant exercisable to acquire
a share of common stock at $4.50 per share for a period of three years.
The underwriter for the proposed public offering is to receive a
commission equal to ten percent of the proceeds of the public offering
plus a three percent non-accountable expense allowance. In addition, the
Company has agreed to engage the underwriter as a financial advisor for
three years at a total fee of $108,000, payable at the closing of the
public offering. The underwriter will also receive warrants to purchase
150,000 shares of common stock at $6.00 per share during the five-year
period commencing on the date of the offering and warrants to purchase
of $.28125 per warrant additional warrants to purchase up to 300,000
shares of common stock exercisable at $6.00 per share during the three
period commencing on the date of the offering.
F-25
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Interim Financial Report
September 30,1997
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Gateway American Properties Corporation
We have audited the accompanying balance sheet of Gateway American
Properties Corporation as of December 31, 1995 and 1996, and the related
statements of operations, shareholders' equity, and cash flows for the period
from January 12, 1995 (date of inception) to December 31, 1995 and for the year
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gateway American Properties
Corporation as of December 31, 1995 and 1996, and the results of its operations
and cash flows for the periods then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7 to the
financial statements, the Company's continued operations are dependent upon the
receipt of additional capital and the success of future operations, which raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Beatty & Company, P.A.
Certified Public Accountants
Sarasota, Florida
March 27, 1997 (except for Notes 5, 6, and 7, as to which the date is July 14,
1997)
F-27
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Balance Sheet
ASSETS
As of December 31 As of September 30
1995 1996 1996 1997
---- ---- ---- ----
(Unaudited)(Unaudited)
Current Assets:
Cash & Equivalents $ 76,715 $20,433 $ 30,670 $ 1,560
--------- ------- --------- --------
Other Assets:
Deferred Offering Costs $ 403,848 $31,210 $ 406,963 $ 58,134
Deposits 30,000 0 30,000 0
Organization Costs (Net) 282 211 228 158
--------- ------- --------- --------
Total Other Assets $ 434,130 $31,421 $ 437,191 $58,292
--------- ------- --------- --------
Total Assets $ 510,845 $51,854 $ 467,861 $59,852
========= ======= ========= ========
LIABILITIES & SHAREHOLDERS EQUITY
Current Liabilities:
Accounts Payable $ 28,318 $ 33,548 $ 31,229 $ 55,891
Accrued Liabilities 1,625 2,250 625 4,875
-------- -------- -------- --------
Total Liabilities $ 29,943 $35,798 $ 31,924 $ 60,766
-------- -------- -------- --------
Shareholders' Equity:
Common Stock, $.01 par value,
10,000,000 shares authorized
436,000 shares issued &
outstanding $ 4,360 $ 4,360 $ 4,360 $ 4,360
Purchase Warrants 4,000 4,000 4,000 4,000
Additional Paid-In Capital 646,538 646,538 646,538 646,538
Accumulated Development Stage
Deficit (173,996) (638,842) (218,961) (655,812)
-------- -------- -------- --------
Total Shareholders' Equity $480,902 $16,056 $435,937 $(914)
-------- -------- -------- --------
Total Liabilities &
Shareholders' Equity $510,845 $ 51,854 $467,861 $ 59,852
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Statement of Operations
<TABLE>
<CAPTION>
For the For the
Period from For the For the Period from
Inception For the Nine Months Nine Months Inception
Through Year Ended Ended Ended Through
12-31-95 12-31-96 9-30-96 9-30-97 9-30-97
-------- --------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Development Stage Revenues:
Investment income $ 11,476 $ 1,888 $ 1,491 $ 95 $ 13,459
--------- --------- -------- -------- ---------
Expenses Incurred During Development Stage:
Costs of Withdrawn Public Offering $ 0 $ 406,963 $ 0 $ 0 $ 406,963
General & Administrative Expenses 61,314 23,250 20,929 7,242 91,806
Office Expenses 48,996 10,705 8,461 7,605 67,306
Legal & Professional 18,686 20,376 13,732 2,165 41,227
Travel & Related Costs 33,684 4,812 3,000 0 38,496
Other Miscellaneous Expenses 22,792 628 334 53 23,473
--------- --------- -------- -------- ---------
Total Expenses $ 185,472 $ 466,734 $ 46,456 $ 17,065 $ 669,271
--------- --------- -------- -------- ---------
Deficit Accumulated During Development
Stage $(173,996) $(464,846) $(44,965) $(16,970) $(655,812)
========= ========= ======== ======== =========
Earnings (Loss) Per Share $ (0.48) $ (1.07) $ (0.10) $ (0.04) $ (1.60)
========= ========= ======== ======== =========
Number of shares outstanding for purposes
of computing net loss per share 361,673 436,000 436,000 436,000 408,972
========= ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Statement of Shareholders' Equity
For the Period from Inception to December 31, 1995,
for the Year Ended December 31, 1996,
and for the Nine Months Ended September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Development Total
Stock Purchase Paid-in Stage Shareholders'
$.01 Par Value Warrants Capital Deficit Equity
-------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sale of 287,346 shares of $.01
par value Common Stock and
251,346 Stock Purchase Warrants
for $384,998 less offering costs
of $59,722 $ 2,873 $ 2,513 $319,890 325,276
Sale of 22,654 shares of $.01
par value Common Stock and
22,654 Stock Purchase Warrants
for $26,000 227 227 25,546 26,000
Sale of 126,000 shares of $.01
par value Common Stock and
126,000 Stock Purchase Warrants
for $315,000 less offering costs
of $11,378 1,260 1,260 301,102 303,622
Development Stage Deficit
from inception through
December 31, 1995 (173,996) (173,996)
-------------- ----------- ---------- ------- ---------
Totals - December 31, 1995 $ 4,360 $ 4,000 $646,538 $(173,996) $ 480,902
Development Stage Deficit
accumulated from January 1, 1996
throughDecember 31, 1996 (464,846) (464,846)
-------------- ----------- ---------- ------- ---------
Totals -December 31, 1996 $ 4,360 $ 4,000 $646,538 $(638,842) $ 16,056
Development Stage Deficit
accumulated from January 1, 1997
through September 30, 1997 (Unaudited) (16,970) (16,970)
-------------- ----------- ---------- ------- --------
Totals-September 30, 1997 (Unaudited) $ 4,360 $ 4,000 $646,538 $(655,812) $914
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the For the
Period from For the For the Period from
Inception For the Nine Months Nine Months Inception
Through Year Ended Ended Ended Through
12-31-95 12-31-96 9-30-96 9-30-97 9-30-97
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows From (Used In) Financing Activities:
Sale of Common Stock & Purchase Warrants $ 725,998 $ 0 $ 0 $ 0 $ 725,998
Less Offering Costs for Private Placements (71,100) 0 0 0 (71,100)
--------- --------- --------- --------- ----------
Net Cash Flows From (Used In)Financing Activities $ 654,898 $ 0 $ 0 $ 0 $ 654,898
--------- --------- --------- --------- ----------
Cash Flows From (Used In) Investing Activities:
Deferred Offering Costs $(403,848) $ 372,638 $ (3,115) $ (26,924) $ (58,134)
Deposits (30,000) 30,000 0 0 0
Organization Costs (352) 0 0 0 (352)
--------- --------- --------- --------- ----------
Net Cash Flows From (Used In) investing Activities $(434,200) $ 402,638 $ (3,115) $ (26,924) $ (58,486)
--------- --------- --------- --------- ----------
Cash Flows From (Used In ) Operating Activities:
Development Stage Earnings (Deficit) $(173,996) $(464,846) $ (44,965) $ (16,970) $ (655,812)
Adjustments:
Amortization 70 71 54 53 194
Accounts Payable 28,318 5,230 2,981 22,343 55,891
Accrued Liabilities 1,625 625 (1,000) 2,625 4,875
--------- --------- --------- --------- ----------
Net Cash Flows From (Used In) Operating Activities $(143,983) $(458,920) $ (42,930) $ 8,051 $ (594,852)
--------- --------- --------- --------- ----------
Net Increase (Decrease) In Cash $ 76,715 $ (56,282) $ (46,045) $ (18,873) $ 1,560
Plus Beginning Cash Balance 0 76,715 76,715 20,433 0
--------- --------- --------- --------- ----------
Ending Cash Balance $ 76,715 $ 20,433 30,670 $ 1,560 $ 1,560
========= ========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-31
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Notes To Financial Statements
1. Significant Accounting Policies
A. Development Stage Operations - The Company has been in the development
stage since its inception in late 1994 and subsequent incorporation in January,
1995 as a Florida corporation. The Company's proposed business activity is to
acquire one or more other business entities and/or develop business and
investment activities satisfactory to its shareholders. Since the Company has
not yet commenced full-scale operations and no significant revenues have been
realized through December 31, 1996, the financial statements have been reported
as those of a development stage company.
B. Principles of Consolidation - In connection with its formation, the
Company merged with an affiliated entity (also a development stage company)
effective January 13, 1995. The transaction has been accounted for as a pooling
of interests and, accordingly, the financial statements have been consolidated
to include the accounts of both companies, after elimination of all significant
intercompany balances and transactions.
C. Income Taxes - The Company's accounting policies for financial statement
purposes and income tax reporting purposes may vary due to timing and other
differences. Certain operating losses sustained to date may be offset against
taxable income of future periods.
D. Private Offering Costs - Since the Company has successfully completed
its initial private offerings of common stock, the related costs (which consist
primarily of placement and legal fees) have been offset against the additional
paid-in capital as of December 31, 1995 and 1996.
E. Organization Costs - The costs of organizing the Company, which consist
primarily of legal and filing fees incurred in the process of incorporation,
have been capitalized and are being amortized over a period of sixty months.
F. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
various estimates and assumptions that affect the amounts reported in the
financial statements and the disclosures in the accompanying footnotes. Actual
results may differ from such estimates and the differences may be significant.
G. Reclassifications - Certain amounts reported in the 1995 financial
statements have been reclassified to conform to classifications used in the 1996
financial statements.
F-32
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Notes To Financial Statements
2. Related Party Transactions
A. Legal Matters - An individual who is an officer, director, and
shareholder of the Company is also an officer, director, and shareholder of the
law firm which was engaged by the Company to handle its incorporation, offerings
of securities, and other legal matters. Additionally, the Company intends to
further use such professional services with regard to future legal matters. The
total of all such related party legal fees (inclusive of expense reimbursements)
was $204,441 through December 31, 1995 and $15,802 for the year ended December
31, 1996.
B. Executive Employment Agreement - Subsequent to the approval of the
Company's Compensation Committee, an executive employment agreement was reached
with an individual who is an officer, director, and shareholder of the Company.
Although the contract requires annual basic compensation of $120,000, plus
various benefits, for a two-year period of time beginning upon the successful
completion of the Company's anticipated public offering, management intends to
replace such contract with an agreement for a one-time payment of $37,500 as
specified in the Letter of Intent with the Company's underwriter.
C. Office Rent Agreement - An informal agreement was entered into to rent
furnished office space from a company that is controlled by an individual who is
also an officer, director, and shareholder of the Company. The agreement, which
has been classified as an operating lease, requires weekly payments of $125 and
has no definitive time period.
3. Shareholders' Equity
A. Common Stock - As of December 31, 1995 and 1996, the Company has issued
436,000 shares of its 10,000,000 authorized shares of common stock with a par
value of $.01 per share.
B. Stock Purchase Warrants - The Company has also issued 400,000 stock purchase
warrants in connection with the organization of the Company. Terms of the
warrants entitle holders to purchase one additional share of the Company's
common stock for each warrant at a price of $3.375 per share at any time during
the three-year exercise period.
F-33
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Notes To Financial Statements
4. Loss Per Share
For the periods from inception through December 31, 1995 and 1996, the loss
per share is based upon the weighted average number of common shares
outstanding. The Company's stock purchase warrants have not been considered to
be common stock equivalents in the computation of loss per share because they
are anti-dilutive.
5. Deferred Offering Costs
As of December 31, 1996, the Company has deferred $31,210 in costs
incurred which pertain to its revised proposed public offering. If the offering
is successful, those costs will be charged against the proceeds of the offering.
In the event the offering is withdrawn (as the initial proposed public offering
was during 1996), such costs will be charged to current operations. Such public
offering is not expected to proceed further, however, until the outcome of the
business combination discussed below in Note 6 is determined.
6. Subsequent Events
Subsequent to the date of the financial statements, the Company
entered into agreements involving two other companies, both of which are
domiciled in the state of Colorado. The agreements, one of which is contingent
upon the successful completion of a proposed public offering, would result in
all three companies combining, in effect, to become a single business entity. In
the event such agreements are successfully concluded, the Company's shareholders
will have the right to exchange their common shares and purchase warrants for
common shares and warrants in the new publicly traded entity.
7. Anticipated Business Combination & Use of Cash
Although the December 31, 1996 cash balance of $20,433 has not been
formally restricted, the Company expects to consume the majority of its cash
reserves to facilitate its anticipated business combinations as discussed in
Note 6. Therefore, the amount of funds available for use in the Company's
proposed business activities (as outlined in Note 1) will be limited to those
funds, if any, available subsequent to such expenditures. Continued operations
are thus dependent upon the receipt of additional capital and the success of
future operations.
F-34
<PAGE>
Gateway American Properties Corporation
(A Development Stage Company)
Notes To Financial Statements
8. Interim Financial Statements (Unaudited)
The financial statements as of September 30, 1996 and 1997, and for the periods
then ended are unaudited. However, it is the opinion of the Company's management
that all adjustments necessary for a fair presentation of the financial
statements have been appropriately included.
F-35
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AND STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed financial statements give effect to
the proposed business combination of Gateway American Properties Corporation
(Colorado) (the Registrant), Gateway American Properties, LLC, and Gateway
American Properties Corporation (Florida) on a purchase accounting basis. The
pro forma condensed balance sheet assumes that the business combination was
effective on September 30, 1997, and combines the audited September 30, 1997
balance sheet of Gateway American Properties Corporation (Colorado) and the
unaudited interim September 30, 1997 balance sheets of Gateway American
Properties, LLC and Gateway American Properties Corporation (Florida). The pro
forma condensed statement of operations for the year ended December 31, 1996,
was prepared based upon the historical audited statements of operations of
Gateway American Properties, LLC and Gateway American Properties Corporation
(Florida) for the year ended December 31, 1996. The pro forma condensed
statement of operations for the nine months ended September 30, 1997, was
prepared based upon the unaudited interim statements of operations of Gateway
American Properties, LLC, and Gateway American Properties Corporation (Florida)
for the nine months ended September 30, 1997. The pro forma statement of
operations for each period was prepared assuming the business combination was
effective at the beginning of each period presented.
These pro forma condensed financial statements should be read in conjunction
with the accompanying notes to the pro forma condensed financial statements, the
historical financial statements and notes of Gateway American Properties
Corporation (Colorado), Gateway American Properties, LLC, and Gateway American
Properties Corporation (Florida), all of which are included elsewhere herein.
The unaudited pro forma condensed statements of operations are not necessarily
indicative of future operations or the actual results that would have occurred
had the business combination been consummated at the beginning of each period
presented. Also, because of seasonal and other factors, the results of
operations for the nine months ended September 30, 1997, are not necessarily
indicative of expected results for the fiscal year ending December 31, 1997.
F-36
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
PRO FORMA CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
Gateway Gateway
American American
Properties Gateway Properties Pro Forma
Corporation American Corporation Adjustments
(Colorado) Properties LLC (Florida) (Note 2) Pro Forma
----------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash $ 100 $ 19,290 $ 1,560 $ 20,950
Accounts receivable 58,750 58,750
Accounts receivable,
related party 570,527 570,527
Deposits 72,500 72,500
Land under development 21,543,952 21,543,952
Due from Metro and general
improvement districts
Related parties 1,432,060 1,432,060
Other 161,638 161,638
Loan fees and other assets 342,336 58,292 400,628
--------- ---------- --------- ---------- ----------
Total assets $ 100 $24,201,053 $ 59,852 $ $24,261,005
========= ========== ========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 923,633 $ 60,766 $ 984,399
Accounts payable,
related parties 802,516 802,516
Property taxes payable 58,200 58,200
Customer deposits 338,500 338,500
Notes payable:
Private placements 4,000,000 4,000,000
Banks 12,225,169 12,225,169
Related parties 2,500,219 2,500,219
Other 2,395,269 2,395,269
--------- ---------- ---------- ---------- ----------
Total notes payable 21,120,657 21,120,657
--------- ---------- ---------- ---------- ----------
Total liabilities 23,243,506 60,766 23,304,272
--------- ---------- ---------- ---------- ----------
Minority interest 111,403 111,403
Shareholders' equity:
Preferred stock
Common stock $ 1 4,360 $ 19,159(a) 23,520
Additional paid-in capital 99 646,538 171,173(a) 817,810
Common stock
subscriptions receivable
Stock purchase warrants 4,000 4,000
Accumulated deficit (655,812) 655,812(a)
Members' equity 846,144 (846,144)(a)
--------- ---------- ---------- ---------- ----------
Shareholders' equity 100 846,144 (914) 845,330
--------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity $ 100 $24,201,053 $ 59,852 $ $24,261,005
========= ========== ========== ========== ==========
</TABLE>
See notes to unaudited pro forma condensed financial statements.
F-37
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Gateway Gateway
American American
Properties Gateway Properties Pro Forma
Corporation American Corporation Adjustments
(Colorado) Properties LLC (Florida) (Note 2) Pro Forma
----------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales:
Related party $ 4,485,601 $4,485,601
Other 2,260,944 2,260,944
--------- ---------
6,746,545 6,746,545
Cost of sales 5,353,431 5,353,431
--------- ---------
1,393,114 1,393,114
General and
administrative expenses 791,076 $ 17,065 808,141
--------- --------- --------
Operating income (loss) 602,038 (17,065) 584,973
Interest (expense) income (3,357) 95 (3,262)
---------- --------- ---------- ---------
Income (loss) before
minority interest 598,681 (16,970) 581,711
Minority interest in
income of consolidated
joint ventures 75,335 75,335
---------- --------- ---------- ---------
Income (loss) before
income taxes 523,346 (16,970) 506,376
Provision for income taxes $ 202,500(b) 202,500
---------- --------- ---------- ---------
Net income (loss) $ 523,346 $ (16,970)$ (202,500) $ 303,876
========== ========= ========== =========
Net income (loss) per
common share before
initial public offering $ (.05) $ .13
========= =========
Average shares outstanding 327,000 2,025,000 2,352,000
========= ========== =========
Net income (loss) per
common share after
initial public offering $ (.05) $ .08
========= =========
Average shares outstanding 327,000 3,525,000 3,852,000
========= ========= =========
</TABLE>
See notes to unaudited pro forma condensed financial statements.
F-38
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (CONTINUED)
(Unaudited)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Gateway Gateway
American American
Properties Gateway Properties Pro Forma
Corporation American Corporation Adjustments
(Colorado) Properties LLC (Florida) (Note 2) Pro Forma
----------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales:
Related party $ 7,901,928 $ 7,901,928
Other 2,598,678 2,598,678
---------- ----------
10,500,606 10,500,606
Cost of sales 9,549,080 9,549,080
---------- ----------
951,526 951,526
General and
administrative expenses 791,522 $ 466,734 1,258,256
---------- --------- ----------
Operating income (loss) 160,004 (466,734) (306,730)
Interest income 1,450 1,888 3,338
---------- --------- ----------
Income (loss) before
minority interest 161,454 (464,846) (303,392)
Minority interest in
income of consolidated
joint ventures 52,010 52,010
---------- --------- ----------
Income (loss) before
income taxes 109,444 (464,846) (355,402)
Provisions for income taxes $ 31,400(b) 31,400
---------- --------- --------- ----------
Net income (loss) $ 109,444 $ (464,846) $ (31,400) $ (386,802)
========== ========= ========= ==========
Net income (loss) per
common share before
initial public offering $ (1.42) $ (.16)
========= ==========
Average shares outstanding 327,000 2,025,000(c) 2,352,000
========= ========= ==========
Net income (loss) per
common share after
initial public offering $ (1.42) $ (.10)
========= ==========
Average shares outstanding 327,000 3,525,000(d) 3,852,000
========= ========= ==========
</TABLE>
See notes to unaudited pro forma condensed financial statements.
F-39
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Merger
Pursuant to the terms of the Agreement Providing for Sale and Exchange of
Capital Stock as amended (the Transaction Agreement), effective October 1,
1997, the shareholders of Gateway American Properties Corporation
(Florida) received 327,000 shares of Gateway American Properties
Corporation (Colorado) common stock in exchange for the net assets of
Gateway American Properties Corporation (Florida). In addition, members of
Gateway American Properties, LLC will receive 2,025,000 shares of Gateway
American Properties Corporation common stock in exchange for their
membership interest which will occur on the effective date of the initial
public offering contemplated by this registration statement. Under the
terms of the Transaction Agreement, the issuance of 1,500,000 shares of
Gateway American Properties Corporation common stock at $4.00 per share to
purchasers in the initial public offering in exchange for the offering
proceeds is an integral part of the business combination transaction, and
the business combination transaction that is to be completed on the
effective date or immediately prior to the initial public offering is
conditional upon the successful completion of the initial public offering.
For financial accounting purposes, the pro forma financial statements
assume that the business combination transaction will be accounted for
under purchase accounting; for statement of operations purposes, the
business combination transaction was effective as of the beginning of each
period presented; and for balance sheet purposes, the business combination
transaction was effective on September 30, 1997. Because the
business combination is a reverse acquisition, the assets and liabilities
of Gateway American Properties, LLC will be reflected in the balance
sheet subsequent to the merger at historical cost and no goodwill will be
recorded. Furthermore, notwithstanding that the initial public offering
is an integral part of the business combination transaction, the pro forma
financial statements give no effect to the proceeds of the initial public
offering except that the net income (loss) per common share after the
initial public offering assumes that 1,500,000 common shares will be
outstanding in conjunction with the proposed initial public offering.
2. Pro forma adjustments:
a. For financial accounting purposes, the business combination is assumed to
be a reverse acquisition. Since 2,352,000 shares of Gateway American
Properties Corporation (Colorado) common stock (par value $.01) will be
outstanding, common stock was increased $19,159 and additional paid-in
capital was increased by $171,173. This was offset against the elimination
of Gateway American Properties, LLC members' equity of $846,144, and the
reclassification of Gateway American Properties Corporation (Florida)
accumulated deficit into additional paid-in capital.
F-40
<PAGE>
GATEWAY AMERICAN PROPERTIES CORPORATION (COLORADO),
GATEWAY AMERICAN PROPERTIES, LLC
GATEWAY AMERICAN PROPERTIES CORPORATION (FLORIDA)
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. Pro forma adjustments (continued):
The balance sheet does not give effect to the increase in cash, common
stock and additional paid-in capital that would be realized with the
proposed initial public offering of 1,500,000 common shares and 3,000,000
warrants. The initial public offering will occur in conjunction with the
business combination.
b. Gateway American Properties, LLC, as a limited liability company, did
not pay income taxes. For purposes of determining the pro forma effect of
the business combination, income tax expense has been computed as if
Gateway American Properties, LLC had been a C corporation. The income tax
provision assumes that Gateway American Properties, LLC had adopted SFAS
No. 109, Accounting for Income Taxes. The balance sheet effect of adopting
SFAS No. 109 would not be material.
c. The pro forma net income (loss) per common share before initial public
offering reflects the additional common shares that will be outstanding
after the business combination (see Note 1), but does not give effect to
additional common shares that would be issued under the initial public
offering.
d. The pro forma net income (loss) per common share after initial public
offering reflects the additional common shares that will be outstanding
after the consummation of the business combination (see Note 1) and the
proposed initial public offering which will occur in conjunction with the
business combination. The calculation does not give any effect to the
proceeds that will be received under the initial public offering.
F-41
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or the Underwriter. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy the Units
of the Company to any person in any jurisdiction or in any circumstances in
which such offering would be unlawful. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
TABLE OF CONTENTS
Introductory Statement........................ 4
Prospectus Summary............................ 6
Risk Factors.................................. 10
Selected Financial Information................ 18
Management's Discussion and Anal-
ysis of Results of Operations............... 21
Dilution...................................... 26
Use of Proceeds............................... 27
Pro Forma Capitalization...................... 27
Dividend Policy............................... 27
Business...................................... 28
Certain Transactions.......................... 36
Management.................................... 41
Principal Shareholders........................ 46
Underwriting.................................. 47
Description of Securities..................... 47
Selling Stockholders.......................... 50
Legal Matters................................. 51
Experts....................................... 52
Additional Information........................ 52
Index to Financial Statements................ F-1
Until [________________], 1998, all dealers affecting transactions in the
registered securities, whether or not participating in the distribution thereof,
may be required to deliver a Prospectus. This is in addition to the obligation
of dealers to deliver a Prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
627,000 shares of Common Stock
GATEWAY AMERICAN PROPERTIES
CORPORATION
------------------------------------
ALTERNATE
P R O S P E C T U S
FOR
SELLING STOCKHOLDERS
------------------------------------
[_____________], 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
- ---------------------------------------------------
Section 7-3-101.5 of the Colorado Corporation Code contains broad
provisions for the mandatory and permissive (at the election of the Company)
indemnification of the Company's directors and officers (and certain other
persons) for liabilities and claims arising out of the acts of omissions of
Company directors and officers (and certain other persons) in their capacity as
such if the actions were undertaken in good faith in a manner reasonably
believed to be in or not opposed to, the best interests of the Company, and
further specifies the circumstances under which such indemnification shall be
available.
As permitted by the cited section of the Colorado Corporation Code, the
Company has adopted provisions in its Articles of Incorporation and Bylaws
providing for indemnification of directors and officers (and certain other
persons) to the extent legally permitted.
Article XI of the Company's Articles of Incorporation reads:
"Section 1. Right to Indemnification. The corporation shall indemnify any
person who was, is , or is threatened, pending or completed action, suit, or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee, fiduciary
or agent of the corporation or who, while a director, officer, employee,
fiduciary or a agent of the corporation, is or was serving at the request of the
corporation as a director, officer, partner, employee, fiduciary, or agent of
another corporation, partnership, joint venture, trust, or other enterprise or
employee benefit plan, against expenses (including attorneys' fees), judgments,
fines and amounts pain in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding, to the extent that and under
the circumstances in which the Act permits such indemnification. The corporation
shall indemnify any person who was, is, or is threatened to be made a party to
any threatened, pending, or completed action, suit or proceeding by or in the
right of the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee, fiduciary or agent of the
corporation or who, while a director, officer, employee, fiduciary or agent of
the corporation, is or was serving at the request of the corporation as a
director, officer, employee, fiduciary or agent of another corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan,
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with such action, suit or proceeding, to the extent that and
under the circumstances which the Act permits such indemnification.
Section 2. Manner of Indemnification. Any indemnification under this
Article (unless ordered by a court) shall be made as authorized in a specific
case upon a determination that indemnification of the director, officer,
employee, fiduciary, or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in the Act with respect to
indemnification of directors. Such determination may be made: (a) by the Board
of Directors by a majority vote of a quorum consisting of Directors who were not
parties to such action, suit, or proceeding, or (b) if such a quorum is not
II-1
<PAGE>
obtainable, by a majority vote of a committee of the Board designated by the
Board, which committee shall consist of two (2) or more Directors who were not
parties to the action, suit, or proceeding, except that Directors who were
parties to the action, suit, or proceeding may participate in the designation of
Directors for the committee. If such quorum is not obtainable or such committee
cannot be established pursuant to (a) and (b) above, or even if such quorum is
obtained or such committee is designated if such quorum or committee so directs,
such determination shall be made: (a) by independent legal counsel selected by
vote of the Board of Directors or the committee in the manner specified in (a)
or (b) above (as the case may be) or, if a quorum cannot be obtained and a
committee cannot be established pursuant to (a) and (b) above, by independent
legal counsel selected by a majority vote of the full Board. Authorization of
indemnification and evaluation as to reasonableness of expenses may be made in
the same manner as the determination that indemnification is proper is made;
except that, if the determination that indemnification is proper is made by
independent legal counsel (as set forth above), authorization of indemnification
and evaluation as to reasonableness of expenses may be made by the body that
selected said counsel.
Section 3. Non-Exclusive Right. The foregoing right of indemnification
shall not be deemed exclusive of any other right to which those seeking
indemnification may be entitled and shall continue as to a person who has ceased
to be a director, officer, employee, fiduciary, or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Section 4. Personal Liability. The personal liability of a director to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director is hereby eliminated, except that such provision shall not
eliminate or limit the liability of a director to the corporation or its
shareholders for monetary damages for: any breach of the director's duty of
loyalty to the corporation or to its shareholders; acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
acts specified in Section 7-108-403 of the Act; or any transaction from which
the director derived an improper personal benefit.
Section 5. Vote to Amend. A vote of two-thirds (2/3) of each class of stock
entitled to vote shall be required to amend this article."
Article IX of the Company's Bylaws reads:
"ARTICLE IX. INDEMNIFICATION AND RELATED MATTERS
Section 1.Indemnification - Third Party Actions. The Corporation shall
indemnify any person who was, is, or is threatened to be made a
part of any threatened, pending or completed action, suit, or
proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal (other than an
action by or in the right of the Corporation). Such
indemnification shall arise only be reason of the fact that the
person is or was a Director, officer, employee, fiduciary, or
agent of the Corporation or who, while a Director, officer,
employee, fiduciary, or agent of the Corporation, is or was
serving at the request of the Corporation as a director, officer,
partner, employee, fiduciary, or agent of another corporation,
II-2
<PAGE>
partnership, joint venture, trust, other enterprise, or employee
benefit plan. Such indemnification shall be against expenses
(including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by such person in
connection with such action, suit, or proceeding, to the extent
that and under the circumstances wherefore the Act permits
indemnification of directors.
Section 2.Indemnification - Actions Brought in the Right of the
Corporation. The Corporation shall indemnify any person who was,
is, or is threatened to be made a party to any threatened,
pending, or completed action, suit or proceeding by or in the
right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a Director, officer,
employee, fiduciary, or agent of the Corporation or who, while a
Director, officer, employee, fiduciary, or agent of the
Corporation, is or was serving at the request of the Corporation
as a director, officer, employee, fiduciary, or agent of another
corporation, partnership, joint venture, trust, other enterprise,
or employee benefit plan. Such indemnification shall be against
expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with such action, suit, or
proceeding, to the extent that and under the circumstances
wherefore the Act permits indemnification of directors.
Section 3.Determination of Entitlement to Indemnification. Any
indemnification under Sections IX.1 and IX.2 (unless ordered by a
court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the
Director, officer, employee, fiduciary, or agent is proper in the
circumstances because he has met the applicable standard of
conduct set forth in the Act with respect to indemnification of
directors. Such determination shall be made; (a) by the Board of
Directors by a majority vote of a quorum consisting of Directors
who were not parties to such action, suit, or proceeding, or (b)
if such a quorum is not obtainable, by a majority vote of a
committee of the Board of Directors designated by the Board of
Directors, which committee shall consist of two or more Directors
who were not parties to the action, suit, or proceeding, except
that Directors who were parties to the action, suit, or
proceeding may participate in the designation of Directors for
the committee. If such quorum is not obtainable or such committee
cannot be established pursuant to Section IX.3(a) and Section
IX.3(b) above, or even if such quorum is obtained or such
committee is designated if such quorum or committee so directs,
II-3
<PAGE>
such determination shall be made; (x) by independent legal
counsel selected by vote of the Board of Directors or the
committee in the manner specified in Section IX.3(a) or Section
IX.3(b) above (as the case may be) or, if a quorum cannot be
obtained and a committee cannot be established pursuant to
Section IX.3(a) and Section IX.3(b) above, by independent legal
counsel selected by a majority vote of the full Board of
Directors, or (y) by the shareholders. Authorization of
indemnification and evaluation as to reasonableness of expenses
shall be made the same manner as the determination that
indemnification is proper is made; except that, if the
determination that indemnification is proper is made by
independent legal counsel (as set forth above), authorization of
indemnification and evaluation as to reasonableness of expenses
may be made by the body that selected said counsel.
Section 4.Advancement of Expenses. Reasonable expenses incurred in
defending a civil or criminal action, suit, or proceeding may be
paid by the Corporation in advance of the final disposition of
such action, suit, or proceeding, to the extent that and under
the circumstances wherefore the Act permits such advancement for
directors.
Section 5.Savings Clause. The indemnification provided by this Article
IX shall not be deemed exclusive of any other rights to which
those indemnified may be entitled under any Bylaw, agreement,
vote of shareholders or disinterested Directors or otherwise,
both as to action in the person's official capacity and as to
action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a Director, officer,
employee, fiduciary, or agent and shall inure to the benefit of
the hears and legal representatives of such a person.
Section 6.Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a
Director, officer, employee, fiduciary, or agent of the
Corporation or who, while a Director, officer, employee,
fiduciary, or agent of the Corporation, is or was serving at the
request of the Corporation as a Director, officer, partner,
employee, or agent of another corporation, partnership, joint
venture, trust, other enterprise, or employee benefit plan,
against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such, whether
or not the Corporation would have the power to indemnify him
against such liability under the provisions of the Article IX and
the Act.
Section 7.Disallowed Deductions. With respect to any payment made by
the Corporation to any employee or any officer of the Corporation
for compensation, bonus, interest, rent, travel, entertainment,
or other expenses incurred by such employee or officer that is
determined to be excessive, unreasonable, or otherwise
II-4
<PAGE>
unallowable, in whole or in part as a tax deductible expense by
any governmental agency, such employee shall have an
unconditional obligation to reimburse the Corporation to the full
extent of such unallowable expense. In lieu of payment by the
officer, subject to the determination of the Directors,
proportionate amounts may be withheld from his future
compensation payments until the amount owed to the Corporation
has been recovered.
The Company is in the process of applying for liability insurance coverage
in the face amount of $2,000,000 for its directors and officers for claims and
liabilities arising out of their actions taken in those capacities. It is
anticipated that this coverage will be in place prior to the Effective Date of
the Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or persons
controlling the Company pursuant to the referenced provisions, the Company has
been informed that in the opinion of the United States Securities and Exchange
Commission, such indemnification violates public policy as expressed in such Act
and is therefore unenforceable."
Item 25. Other Expenses of Issuance and Distribution
- -----------------------------------------------------
Securities and Exchange Commission Registration Fee $8,641
NASD Filing Fee $3,351
Accounting Fees and Expenses $85,000
Blue Sky Filing Fees and Expenses $10,000
Legal Fees and Expenses $80,000
Printing Fees and Expenses $25,000
Transfer Agent Fees $7,500
Miscellaneous $3,633
TOTAL $223,125
Item 26. Recent Sales of Unregistered Securities
- -------------------------------------------------
Information with respect to all securities sold by the Company during the
past three years prior to the filing of the Registration Statement and with
respect to securities to be sold by the Company contemporaneously with the
effectiveness of the Registration Statement, all without registration of any
such sales under the Securities Act of 1933, as amended ("Act") is as follows:
1. (a) On March 21, 1997 the Company sold 10 shares of its $.01 per
value Common Stock ("Common Stock");
II-5
<PAGE>
(b) No person or entity acted as an underwriter with respect to this
transaction. The 10 shares were sold to Harvey E. Deutsch, President
and a director of the Company;
(c) The 10 shares were sold for cash at $1.00 per share or a total of
$10.00. There was no underwriting or other discount or commission paid
on the sale;
(d) Mr. Deutsch acquired the 10 shares for investment and not with a
view to distribution and as "restricted securities" as that term is
defined under the Act. The certificates issued to reflect these 10
shares contains an appropriate legend denoting their status as
restricted securities. In this transaction, the Company relied upon
the exemption from the Registration Requirements of Section 5 of the
Act provided in Section 4(2) thereof as a transaction by an issuer not
involving a public offering. Mr. Deutsch will donate these 10 shares
back to the Company upon the completion of the transaction described
in 3 below;
2. (a) On October 8, 1997 the Company issued 327,000 shares of its
Common Stock and Warrants to purchase 300,000 Shares of its Common
Stock ("Founders Warrants") in a transaction involving the corporate
statutory merger of Gateway American Properties Corporation, a Florida
corporation ("Gateway - Florida") into the Company;
(b) No person or entity acted as an underwriter with respect to the
transaction. The securities were issued to the persons who were the
shareholders of Gateway - Florida; namely: Robert B. Abel, Anna S.
Beeler Olthouse, Anna S. Olthouse & Larry J. West, Aime G. & Arietta
N. Begin, Kenneth Benedict and Wanda Benedict, JTWROS, James A. &
Barbara A. Bird, Bizz Mark, Inc., James E. Brassfield, Ben Boren,
Robert M. Brodbeck, Marilyn S. Brown, Cynthia C. Butler, Lawrence
Castle, Kent B. Connally, Corporate Communication Network, Inc.,
Randall J. Coyne, Marshall D. Davis, Esq., Robert R. DeMaris, Paul
DeMaris, Donna Dryman & Joe Stumbo, as Trustees of the Alfred G.
DeMaris, Sr. Trust FBO Alfred G. DeMaris, Jr., Elmer L. & Judith A.
Eagle, Geraldine C. Elliot (Cocciardi), Richard L. Fisher, S & G
Partnership, General Acceptance Corp., Granite Laurel, Inc. S.A.,
Kristen Graves, Karron Graves, Kia Graves, John P. Graves, Jr., Gail
M. Graves, Pamela J. Grier, Ralph H. Grills, Jr., Barry J. Higgins,
Sibert M. & Sharon L. Hill, Russell & Joyce M. Holzman, William T.
Kirtley, William T. Kirtley, P.A. Profit Sharing Plan William T.
Kirtley, Trustee,Ellen Lane, Joseph R. & Pauline A. Lariviere, Maurice
L. Lariviere, Gabriel Lotan, Howard J. & Carmela V. Manetti, James T.
McDonough, Clark Morton, Mari Morton, Margaret Mountain, Sam Newton,
Robert M. Nieder, Allyson Palmer, George D. Phillips, Leonard A.
Pluss, The Prager Irrevocable Trust, William Lee Pryor III, ROMED, G.
II-6
<PAGE>
Lawrence & Carolyn M. Schmidt, Willard D. Sheffield, Norman Sheldon,
Theresa Shulman, Carroll V. SoRelle, Sheldon & Judith Spector, Mervin
F. Stelter, Terry L. Stewart, Dianne Van Etten, H. E. "Bud" & Camille
A. Van Orden, Veggo Larsen Hanifen Imhoff IRA, M. Rean Wegley, and
Jerry P. Youmans,
(c) These securities were issued in consideration for the assets of
Gateway - Florida acquired in the merger by the Company (the assets
are reflected in the Financial Statements of Gateway - Florida
included in the Registration Statement). The securities were issued
pursuant to the Agreement, Plan and Articles of Merger filed as
Exhibit 10(d) to the Registration Statement, and in certain respects,
subject to the provisions of the Amended and Restated Agreement
Providing for Sale and Exchange of Capital Stock between and among
Gateway - Florida, the Company, Gateway American Properties LLC, a
Colorado limited liability company ("Gateway") and the holders of
Membership Interests in Gateway which is filed with the Registration
Statement as Exhibit 10(e). The assets acquired by the Company for
which these shares were issued were valued, for corporate law
purposes, at $406,963 which was the identifiable cash cost that
Gateway-American Florida incurred in the transaction to be completed
under Exhibit (10)(e);
(d) These securities were acquired by the recipients for investment
and not with a view to distribution and as restricted securities. The
investors were all experienced sophisticated investors and they had
access to the information relative to the Company. The 327,000 shares
of Common Stock issued in the transaction and the 300,000 shares of
Common Stock underlying the Warrants are included in the Registration
Statement; but are subject to certain "lock-up" provisions prohibiting
their sale, without the prior consent of the Representative of the
Underwriters for 90 days from the "Effective Date" of the Registration
Statement in the case of Date Shares and 15 months from the Effective
Date for the balance of the shares. The certificates issued to
represent these shares have a legend denoting these "lock-up"
provisions. These securities were issued by the Company in reliance
upon the exemption from the registration requirements of Section 5 of
the Act provided in Section 4(2) thereof as a transaction by an issuer
not involving a public offering.
3. (a) Immediately prior to the effectiveness of the Registration
Statement, the Company will issue an aggregate of 2,025,000 shares of
its Common Stock in a transaction involving the requisition of 100% of
the outstanding Membership Interests in Gateway American Properties,
LLC, a Colorado limited liability company ("Gateway");
(b) No person or entity will act as an underwriter with respect to
this Transaction. The securities will be issued to the Company's three
officers and directors (including their immediate family members
and/or trusts for the benefit of such persons) and four other holders
of Membership Interests in Gateway, all of whom are employees of
Gateway and/or the Company; namely: Harvey E. Deutsch, Paula K.
Deutsch, Steven H. Deutsch, Robert A. Lembke, Joel H. Farkas, and
Theodore Z. Gelt, Trustees, Stacia F. Deutsch Trust; Robert A. Lembke,
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<PAGE>
Joel H. Farkas, and Theodore Z. Gelt, Trustees, Steven H. Deutsch
Trust; Robert A. Lembke, Joel H. Farkas and Theodore Z. Gelt,
Trustees, Karen G. Deutsch Trust; Michael A. Messina, Joel H. Farkas,
Harvey E. Deutsch, Robert Lembke and Theodore Z. Gelt, Trustees The
Kenyon Trust; Jeffrey Kenneth Prager, John M. Spillane, Jack E.
Reutzel, and James J. Weigel.
(c) These securities will be issued in consideration for the
Membership Interests of Gateway pursuant to the provisions of the
Amended and Restated Agreement for the Sale and Exchange of Capital
Stock between and among Gateway-Florida, The Company, Gateway and the
Holders of Membership Interests in Gateway which is filed with the
Registration Statement as EXHIBIT 10(c);
(d) These securities will be acquired by the recipients for investment
and not with a view to distribution and as restricted securities. The
recipients are all sophisticated investors and have access to
information concerning the Company. The certificates issued to
represent these securities will contain an appropriate legend denoting
their status as restricted securities and a stock transfer order on
these will be placed with the Company's Transfer Agent. These
securities were issued by the Company in reliance upon the exemption
from the registration requirements of Section 5 of the Act provided in
Section 4(2) thereof as a transaction by an issuer not involving a
public offering.
4. (a) On September 12, 1996, Gateway LLC, a predecessor and as of
the Effective Date of the Registration Statement a subsidiary of the
Company, completed a private placement of $4 million in principal
amount of 12% Secured Promissory Note ("Note"), due September 30, 1999
with principal payments of $500,000 each due on December 31, 1997 and
each three months thereafter, with interest at 12% payable monthly,
and collateralized by deed of trust on various parcels of real
property and guaranteed by Messrs. Deutsch, Farkas and Messina,
officers and directors of the Company;
(b) Phillips & Tober, Inc. of Denver, Colorado acted as placement
agent or underwriter in the placement of the Note. Interests in the
Note were sold to: Alexander A. and Mary J. Arinielio, Joe W. Clark,
Richard E. Collier, Sandra Collier for Evan and Kelly Collier, ROEL
Family Partners, Arthur Dykstra, Patricia Dykstra, William C. Eade,
Elfine Plumbing & Heating PSP, First Trust - Faraci (formerly C.L.
Phillips), Mary & Joel Gesink, Colorado Imaging Associates, P.S. EPSP
(Goodman), Martin & Renee Gross (TIC), First Trust Corp. for Allen J.
Hankinson, Stanley L. Hannah, MD, PC Retirement Plan, William R.
Hartmuller and SBS Enterprises, Denver Nephrologists, P.C., Ray M.
Jenkins and Colorado Orthopedic Clinic, P.C., Edwin E. Koepke Trust,
Merry N. Lester, Hill Farm Partners, LP, McFerren Garvey Company, Sam
Mersfelder, Albert Miller, DDS, Donald E. Miller, Rocky Mtn.
Radiologists, Michael H. Ross, Frank A. Scott, Litamae Sher, SoRelle
Family Partnership, Ltd., Robert Striker, Kenneth E. Weaver, Edward
Vagnino, Gordon E. Von Stroh, Westwood Dental Group, Charline B.
White, Dallas Yeargain, Goldie Zerobrick (III), Kenneth C. Manfre, and
Henry R. and Suzanne C. Robinson.
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<PAGE>
(c) The total proceeds from the Note was $4,000,000 and Gateway, LLC
paid commissions and expenses to Phillips & Tober, Inc. of $ for its
services;
(d) The interests in the Note were acquired by the recipients for
investment and not with a view to distribution and constituted
restricted securities. The investors in the Note were experienced,
sophisticated investors and the had access to information about
Gateway LLC. These securities were issued by the Gateway LLC in
reliance upon the exemption from the registration requirements of
Section 5 of the Act provided in Section 4(2) thereof as a transaction
by an issuer not involving a public offering.
Item 27. Exhibits
- ------------------
The following are filed as revised or additional Exhibits to the Registration
Statement:
(23)(d)(2)Updated Consent of Accountants - Gelfond Hochstadt Pangburn & Co.
(23)(d)(3)Updated Consent of Accountants - Beatty & Co.
Item 28. Undertakings
- ----------------------
1. The undersigned Registrant hereby undertakes;
(a) to file during any period in which offers or sales of the
securities are being made, a post-effective amendment to this
Registration Statement including any Prospectus required by Section
10(a)(3) of the Securities Act of 1933, reflecting any facts or events
arising after the Effective Date (or most recent post-effective
amendment) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement, and including any material information with respect to the
plan of distribution not previously disclosed or any material change
to such information set forth in the Registration Statement;
(b) that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
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<PAGE>
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering: and;
(d) the Registrant will at the closing specified in the underwriting
agreement deliver to the underwriter certificates and warrants in such
denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser of the offered
securities.
2. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions of
the Bylaws of Registrant and the Florida General Corporation Act set
forth in Item 24 of this Part II, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel
that matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
3. To file a Post-Effective Amendment to the Registration Statement if
the "lock-up provisions" applicable to the shares registered for sale
by Selling Shareholders are waived the Representative for 10% or more
of these shares; or add a sticker to the Prospectus if these
provisions are waived for more than 5% but less than 10% of these
shares.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reason to believe that it meets all of the
requirements of filing on Form SB-2 and authorizes this Amendment 2 to the
Registration Statement to be signed on its behalf by the undersigned, in the
City of Denver, State of Colorado, on February 2, 1998.
GATEWAY AMERICAN PROPERTIES
CORPORATION, a Colorado corporation
By /s/ Harvey E. Deutsch
----------------------------------
Harvey E. Deutsch, President
and Chief Executive Officer
By /s/ Joel H. Farkas
----------------------------------
Joel H. Farkas, Vice-President
- Finance/Marketing, Treasurer and
Chief Operating and Accounting
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Harvey E. Deutsch Director February 2, 1998
----------------------------
Harvey E. Deutsch
/s/ Joel H. Farkas Director February 2, 1998
----------------------------
Joel H. Farkas
/s/ Michael A. Messina Director February 2, 1998
----------------------------
Michael A. Messina
/s/ Robert A. Lembke Director February 2, 1998
----------------------------
Robert A. Lembke
/s/ Norman A. Sheldon Director February 2, 1998
----------------------------
Norman A. Sheldon
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Registration No. 333-37991
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
--------------------------
EXHIBITS
TO
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Contains Exhibits (23)(d)(2) and (23)(d)(3)
GATEWAY AMERICAN PROPERTIES CORPORATION
-----------------------------------------
(Name of registrant as specified in charter)
Exhibit (23)(d)(2)
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated September 22, 1997, relating to the financial statements of Gateway
American Properties, LLC and subsidiaries, and our report dated November 19,
1997, related to the balance sheet of Gateway American Properties Corporation (a
Colorado corporation), and to the reference to our Firm under the caption
"Experts" in the Prospectus.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
February 2, 1998
Exhibit (23)(d)(3)
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in Amendment Number 2 to Form SB-2 Registration
Statement under the Securities Act of 1933 of Gateway American Properties
Corporation (a Colorado corporation) of our report on the December 31, 1995 and
1996 financial statements of Gateway American Properties Corporation (a Florida
corporation) dated March 27, 1997 (except for Notes 5, 6, and 7, as to which the
date is July 14, 1997) appearing in the Prospectus, which is a part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Beatty & Company
------------------------------
Beatty & Company, P.A.
Certified Public Accountants
Sarasota, Florida
February 3, 1998
