<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from
to
---------- ----------
Commission File No. 1-4766
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GATEWAY ENERGY CORPORATION
----------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 44-0651207
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
10842 Old Mill Road, Suite #5
Omaha, NE 68154
----------------------------------------
(Address of principal executive offices)
Issuer's telephone number (402) 330-8268
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
As of September 30, 1996 the Issuer had 34,627,992 shares of its common
stock outstanding.
Transitional Small Business Disclosure Format: Yes No X
---- -------
<PAGE>
FORM 10-QSB
PART I
ITEM 1. FINANCIAL STATEMENTS
Page
Unaudited Consolidated Balance Sheet
as of August 31, 1996. 6
Unaudited Consolidated Statements of Operations for
the three months and six months ended August 31, 1996,
and August 31, 1995. 8
Unaudited Consolidated Statements of Cash Flows for
the six months ended August 31, 1996,
and August 31, 1995. 9
Notes to Consolidated Financial Statements 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following management's discussion and analysis contains trend analysis
and other forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Actual results could differ materially from those
projected in the forward-looking statements throughout this document as a result
of the risk factors set forth below in the section entitled "Factors Affecting
Future Results" and elsewhere in this document.
RESULTS OF OPERATIONS
Natural gas prices as reflected by the monthly NYMEX index prices averaged
$2.44 and $2.51 for the three months and six months ended August 31, 1996,
compared to $1.56 in each of the comparable periods in 1995. El Paso index
prices were also higher reflecting continued demand for natural gas and lower
storage volumes than normal. These high prices have resulted in increased
drilling and production activities and producers have also invested capital
funds to rework and improve production on existing wells. Natural gas prices
continue to be strong into October as the heating season begins.
<PAGE>
THREE MONTHS ENDED AUGUST 31, 1996 COMPARED TO AUGUST 31, 1995.
The following table sets forth information for the three months ended August
31, 1996 and 1995:
Increase
1996 1995 (Decrease)
---------- ---------- ----------
Operating Revenues $6,229,700 $2,841,200 $3,388,500
Operating Margin 1,755,300 703,700 1,051,600
Depreciation, Depletion and Amortization 820,300 159,400 660,900
General and Administrative 552,900 425,700 127,200
Other Income (Expense) (570,300) 23,300 (547,000)
Net Earnings (194,500) 136,100 (330,600)
Loss Applicable to Common Stock (875,400) (483,000) (392,400)
OPERATING REVENUES. Operating revenues increased $3,388,500 or 20% over
the prior year period. Castex Energy 1995 LP, 71% owned by the Company and
formed in January 1996, had revenues from oil and gas sales of $1,354,900 in the
second quarter of 1996. Gas sales revenues from joint ventures increased
$1,492,400 due to price increases of $450,000 and volume increases of $835,200.
Gas processing revenues increased $207,200 due to increased volumes of gas
processed. Revenues from Fort Cobb Fuel Authority decreased $200,000 due to a
decrease in irrigation volumes resulting from favorable growing conditions.
In 1996, Gateway Pipeline Company ("GPC") began marketing gas produced by
an affiliate, such revenues were $421,000 in the second quarter. Revenues from
Venture Resources, Inc, acquired March 1, 1996, were $310,000 in this quarter.
OPERATING MARGINS. Operating margins are defined as operating revenues
less gas purchases, and operation and maintenance expenses. Operating
margins increased $1,051,600 or 150% over the prior year period. The increase
was primarily from Castex LP which generated $1,153,000 of operating margin
for the period. Operating margins from other operations were adversely
affected by higher operating and maintenance expenses and excessive line losses
at Fort Cobb.
DEPRECIATION AND DEPLETION. Depreciation and depletion increased $660,900
due almost entirely to $595,000 of depletion from Castex LP oil and gas
production. The remaining increase in depreciation is due to the acquisition of
Venture Resources, Inc. in March 1996.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
increased by $127,200 or 30% over the prior year period. Expenses increased at
GPC and Castex Energy by $107,000, reflecting increases in personnel to manage
Castex LP and other properties acquired. Corporate expenses increased by
$31,000 due to higher accounting and legal fees.
OTHER INCOME (EXPENSE). Other income (expense) decreased $547,000 due
to an increase in interest expense of $345,000 and a charge to earnings of
$200,000 to reflect the loss on the Guymon Pipeline System purchased in July
1995. Interest expense increased primarily due to $289,000 of interest on
the bank line of credit obtained by Castex LP and $35,000 of other interest
reflecting the cost of bridge loans and short-term notes. The Company has
received an unsolicited offer to purchase the Guymon Pipeline and in
September 1996 entered into a Letter of Intent to sell the pipeline for
$575,000 in cash. As a result, the Company recorded a $200,000 loss in the
second quarter to reflect
<PAGE>
the difference in the carrying cost and the net proceeds from the anticipated
sale. (See Notes to the Financial Statements.)
NET EARNINGS. Net earnings decreased $330,600 from the prior year
largely as the result of higher general and administrative costs of $127,200
and the charge to reflect the loss on Guymon Pipeline of $200,000. Also,
higher margins on joint venture properties and acquisitions were offset by
the decrease in margins from Fort Cobb due to unusually favorable growing
conditions during July and August.
LOSS APPLICABLE TO COMMON STOCK. The loss applicable to common stock
increased $392,400 over the prior year period. The increase reflected the
decrease in net earnings and an increase in preferred stock dividends of
$100,000 reflecting the additional sales of Series N Preferred Stock offset by
conversions and redemptions of the Series G Preferred Stock.
SIX MONTHS ENDED AUGUST 31, 1996 COMPARED TO AUGUST 31, 1995.
The following summary sets forth information for the six months ended August
31, 1996 and 1995:
Increase
1996 1995 (Decrease)
----------- ---------- ----------
Operating Revenues $12,604,000 $5,216,800 $7,387,200
Operating Margin 3,532,900 1,216,900 2,316,000
Depreciation, Depletion and Amortization 1,460,900 320,300 1,140,600
General and Administrative 1,041,100 789,300 251,800
Other Income (Expense) (904,600) 73,500 (978,100)
Net Earnings 99,000 172,700 (73,700)
Loss Applicable to Common Stock (1,929,200) (942,700) (986,500)
OPERATING REVENUES. Operating revenues increased $7,387,200 or 142%. Of
this increase, $2,336,000 was attributable to gas and oil sales of Castex LP,
acquired in January 1996. Joint venture revenues increased $3,095,000 due to
an increase in volumes of $2,416,000 and price increases of $679,000. Gas
processing revenues increased by $419,000 due to increases in throughput at the
Company's processing plants.
In 1996, Gateway Pipeline Company ("GPC") began marketing gas produced by
an affiliate, such marketing activities generated $800,000 in revenues during
the current period. Also, GPC acquired Venture Resources, Inc. in March 1996;
revenues attributable to this acquisition were $591,000 in this six- month
period.
OPERATING MARGINS. Operating margins increased $2,316,000 or 190% over the
similar period in the prior year. Castex LP, acquired in January 1996, generated
operating margins of $1,956,000. Joint venture margins increased $295,000 due to
higher volumes and prices but offset by increased operating and maintenance
expense. Margins decreased at Fort Cobb by $159,000 due to higher cost of gas
resulting from line losses and higher operating expenses.
Operating margins from acquisitions made in 1996 by GPC increased by
$200,000 in the six month period. Other increases in operating margins were
offset by legal fees incurred to defend the
<PAGE>
Company against a claim filed against one of the Company's joint ventures. The
claim was settled at mediation in May 1996.
DEPRECIATION AND DEPLETION. Depreciation and depletion increased by
$1,140,600 due primarily from depletion on Castex LP of $1,017,100. Other
depreciation increases of $123,500 resulted from acquisitions made after August
31, 1995, along with minimal capital expenditures on existing properties.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
increased $251,800 due primarily to increases in costs for the Company's Houston
operations. These costs increased $230,000 as a result of increased personnel
costs to manage Castex LP and properties acquired, increased rent and increased
legal and accounting fees. Increase of other corporate expenses for accounting
and legal fees were offset by reduced management fees on Fort Cobb.
OTHER INCOME (EXPENSE). Other income (expense) decreased by $978,100
due primarily to increased interest expense and the $200,000 charge for the
loss on the Guymon Pipeline System. Interest expense increased $673,800
from interest charges of $497,100 on Castex LP and interest expense on bridge
loans and other short-term notes of $176,700. Interest expense includes the
cost of common stock issued for commitment fees for this short-term financing.
NET EARNINGS. Net earnings decreased $73,700 over the prior period.
Operating margin increases were offset by higher general and administrative
costs, interest expense and the charge for impairment of asset value.
LOSS APPLICABLE TO COMMON STOCK. The loss applicable to common stock
increased $986,500 over the prior year period. In addition to the decrease in
net earnings of $125,100 preferred stock dividends increased $207,000 reflecting
additional sales of Series N offset by conversions and redemptions of the Series
G. In addition, preferred stock dividends includes $693,000 for the redemption
of Series C Preferred Stock resulting from the Settlement and Purchase Agreement
entered into with Pipeline Capital, Inc. in May 1996 (See Note 4 to the
Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended August 31, 1996 and 1995, the Company
generated net cash flow from operating activities of $1,590,000 and 360,600,
respectively. The net cash flows from operating activities plus dividend
reserves from Series N and Series G Preferred Stock were used to meet its
dividend obligations. In addition, a portion of the cash generated from
operating activities was used to reinvest in a drilling program at Castex LP
and to reduce the bank line of credit used to acquire the South Lake Arthur
interests.
<PAGE>
During the first six months of fiscal 1997, the Company raised
$1,699,000, before offering costs, from the sale of Series N Preferred Stock.
The Company also issued promissory notes for bridge loans in the amount of
$650,000 and raised $583,000 through the sale of two year convertible notes.
The Company also issued promissory notes in the amount of $150,000 to certain
shareholders.
The Company used the proceeds from the above financings to invest
$1,300,000 in natural gas gathering systems and to repay bridge loans issued
in connection with the purchase of these systems. The proceeds from the
promissory notes to stockholders were used to provide working capital for the
Company.
In July 1996, Castex Energy 1995 LP acquired additional working interests
in the South Lake Arthur Field for $3,371,400. Castex LP also expended $431,700
for drilling costs and additional prospects. Castex LP plans to drill three
additional wells in this fiscal year. Funds for the acquisition and the costs
of drilling were supplied by additional draws from the bank line of credit and
by cash flows from the partnership's operating activities.
As of August 31, 1996, the Company had a working capital deficit of
$1,639,400 which includes bridge loans of $723,600 which are expected to be
repaid through issuance of two-year notes and other permanent financing. The
working capital deficit is caused largely by the current maturity of the bank
line of credit in Castex LP. Although this results in a temporary deficit,
cash flow from Castex LP is expected to be sufficient to meet this obligation.
The Company has temporarily suspended the payment of Series G dividends
effective with the October 1 payment. Revenues from the properties purchased
with Series G proceeds were not sufficient to meet the dividend requirements
and the requirement of $215,000 for a deposit with a supplier of gas on one
of the Company's delivery systems. The Company intends to resume payment of
dividends when revenues from the properties purchased with the proceeds of
Series G are sufficient to repay the deposit.
Prospectively, the Company anticipates that cash flows from operating
activities after meeting debt service requirements related to long-term debt
will not be sufficient to fund all of its preferred stock dividend requirements.
The Company is currently evaluating its alternatives which include issuing
additional common equity, reducing preferred stock dividends through conversion
of the preferred stock, improving the operating performance of its systems and
properties and refinancing or extending the maturity dates of the bridge loans.
The Company believes that a combination of the above will permit the Company to
meet its other dividend requirements. Alternatively, the Company has the option
to suspend the payment of dividends on all series of preferred stock, except
Series G, without default.
As part of its effort to change its capital structure, thereby improving
its working capital position and overall cash flow, the Company is actively
seeking a third party to assist in its effort to exchange the existing preferred
stocks. This third party will assist in designing securities, developing
strategies for implementation and securing additional debt and equity financing
for future acquisitions.
<PAGE>
FACTORS AFFECTING FUTURE RESULTS
Approximately 85% of the Company's gathering and processing revenues are
received under "back to back" contracts where the Company, or its joint venture
partners, purchase gas at the wellhead, transport the gas and sell it to one or
more customers. Accordingly, a substantial majority of the Company's revenues
are affected by the price of natural gas. During times when warm winter
weather conditions prevail, manufacturing needs are down or the supply of
natural gas in the market is up, prices will be lower and the Company's revenues
will be adversely affected. Additionally, approximately 41% of the Company's
properties are managed by joint venture partners or other third parties. The
ability of such parties to manage the properties efficiently affects operating
costs and therefore the revenues that flow through to the Company.
Over the next twelve to eighteen months, the Company also needs to generate
additional capital to continue to make payment of preferred stock dividends. As
discussed above under "Liquidity and Capital Resources", the Company believes
that it has sources and methods to obtain such capital resources. There can be
no assurances, however, that the Company will be successful in any or all of
these capital raising activities. The state of the natural gas market, the
general economic and stock market conditions and the long-term investment value
of the Company's operating properties will have a significant impact upon the
Company's ability to raise capital and generate funds.
The ability of the holders of common stock of the Company to derive
long-term value for their investment is dependent upon the profitable operation
of the Company's properties, the long-term investment value of the Company's
properties, and the ultimate ability of the Company to cause the redemption or
conversion of a substantial portion of the outstanding preferred stock. The
ability of the Company to derive such long-term value for the holders of the
common stock is dependent upon a number of factors, many of which are outside of
the control of the Company, including the ability of third parties to operate
the wells drilled and adequate reserves for existing wells within the purview of
the Company's gathering system properties, the ability of the third party
operators to secure new gas supply and distribution contracts on profitable
terms, the availability of new properties at prices that make profitable
operation possible and the availability of appropriately priced financing to
secure new properties.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,546,900
Restricted cash 94,700
Trade accounts receivable, net 4,956,200
Prepaid expenses and other assets 644,800
------------
Total current assets 7,242,600
PROPERTY AND EQUIPMENT - AT COST
Gas gathering, processing and transportation 13,084,800
Oil and gas properties, using full cost accounting 15,522,600
Office furniture and other equipment 441,800
------------
29,049,200
Less accumulated depreciation, depletion and
amortization (2,874,600)
------------
26,174,600
OTHER ASSETS
Cash escrowed for acquisitions 2,500
Note receivable - related party 289,000
Other 526,400
------------
817,900
------------
$ 34,235,100
------------
------------
The accompanying notes are an integral part of this statement.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 969,700
Current maturities of long-term debt 2,826,300
Accounts payable 4,094,800
Accrued expenses and other liabilities 783,700
Preferred dividends payable 207,500
------------
Total current liabilities 8,882,000
Long-term debt, less current maturities 10,642,700
Minority interests 1,091,500
Preferred stock of subsidiary 470,500
Mandatory redeemable preferred stock 8,313,800
STOCKHOLDERS' EQUITY
Preferred stock 9,400
Common stock- authorized, 75,000,000
shares of $.01 par value; issued,
32,708,953 shares 327,100
Additional paid-in capital 10,477,800
Accumulated deficit (5,979,700)
------------
Total stockholders' equity 4,834,600
------------
$ 34,235,100
------------
------------
The accompanying notes are an integral part of this statement.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended August 31, Six Months Ended August 31
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Natural gas sales $ 5,512,300 $ 2,397,400 11,054,400 4,284,300
Transportation 272,800 193,400 562,600 409,000
Processing and other 444,600 250,400 987,000 523,500
----------- ----------- ----------- -----------
6,229,700 2,841,200 12,604,000 5,216,800
OPERATING COSTS AND EXPENSES
Cost of natural gas purchased 3,515,500 1,581,900 7,251,600 2,923,100
Operation and maintenance 958,900 555,600 1,819,500 1,076,800
General and administrative 552,900 425,700 1,041,100 789,300
Depreciation and depletion 820,300 159,400 1,460,900 320,300
----------- ----------- ----------- -----------
5,847,600 2,722,600 11,573,100 5,109,500
----------- ----------- ----------- -----------
Operating profit 382,100 118,600 1,030,900 107,300
OTHER INCOME (EXPENSE)
Interest income 31,000 16,500 59,700 46,800
Interest expense (362,700) (17,100) (695,300) (21,500)
Minority interests (38,600) 23,900 (69,000) 48,200
Loss on Guymon Pipeline (200,000) - (200,000)
----------- ----------- ----------- -----------
(570,300) 23,300 (904,600) 73,500
----------- ----------- ----------- -----------
Earnings before income taxes (188,200) 141,900 126,300 180,800
Income taxes 6,300 5,800 27,300 8,100
----------- ----------- ----------- -----------
NET EARNINGS (194,500) 136,100 99,000 172,700
Provision for preferred dividends,
including amortization of Series G
offering costs of $120,500, $114,300, $241,000 and
$228,500, respectively, and Series C redemption
cost of $ -0- and $693,000 in 1996 (Note 4). 680,900 574,100 2,028,200 $ 1,115,400
----------- ----------- ----------- -----------
Loss applicable to common stock $ (875,400) $ (438,000) $(1,929,200) (942,700)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Loss per common share $ (0.03) $ (0.02) $ (0.07) $ (0.04)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in
computing the loss per
common share 30,231,300 25,986,100 28,746,000 25,860,900
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended August 31
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities-
Net earnings $ 99,000 $ 172,700
Adjustments to reconcile net earnings to net
cash provided by operating activities-
Depreciation, depletion and amortization 1,460,900 320,300
Loss on Guymon Pipeline 200,000 -
Amortization of deferred income - (21,500)
Minority interest in net income (loss) of subsidiaries 69,000 (48,200)
Compensation accrued under stock award plans (4,100) 21,200
Stock issued for fees and interest 84,600 -
Increase (decrease) in cash and cash
equivalents resulting from changes in-
Trade accounts receivable (914,400) (22,200)
Prepaid expenses and other current assets (264,400) (357,200)
Accounts payable 347,800 375,800
Accrued expenses and other liabilities 423,300 (80,300)
------------ ------------
Net cash provided by operating activities 1,501,700 360,600
------------ ------------
Cash flows from investing activities-
Capital expenditures (677,600) (819,100)
Acquisition of businesses, net of cash
acquired of $79,900 in 1996. (4,833,800) (1,114,200)
Payments (advances) on notes receivable (7,000) 113,600
Other (53,000) 52,800
------------ ------------
Net cash used in investing activities (5,571,400) (1,766,900)
------------ ------------
Cash flows from financing activities-
(Increase) decrease in escrowed cash 708,500 590,300
Payments on borrowings (2,152,000) (236,400)
Proceeds from borrowings 5,264,700 390,000
Redemption of preferred stock (96,000) -
Net proceeds from sale of preferred stock 1,430,600 1,874,800
Preferred dividends paid (1,111,800) (868,500)
------------ ------------
Net cash provided by financing activities 4,044,000 1,750,200
------------ ------------
Net change in cash and cash equivalents (25,700) 343,900
Cash and cash equivalents at beginning of period 1,572,600 337,900
------------ ------------
Cash and cash equivalents at end of period $ 1,546,900 $ 681,800
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying consolidated financial statements have been prepared by
the Company, without audit. In the opinion of management, such financial
statements reflect all adjustments necessary for a fair presentation of the
financial position and results of operations in accordance with generally
accepted accounting principles.
The consolidated financial statements include the accounts of Gateway
Energy Corporation ("GEC"), its joint venture investments, and its majority
owned subsidiaries, Gateway Pipeline Company ("GPC"), Fort Cobb Oklahoma
Irrigation Fuel Authority L.L.C. ("Fort Cobb") Shoreham Gathering Company
("SGC"), Castex Energy Inc. ("Castex"), Castex Energy 1995 LP ("Castex LP") and
Ozark Natural Gas Company ("Ozark"), all collectively referred to as the
"Company". The Company's investments in its joint ventures are accounted for
using the proportional consolidation method. All significant intercompany
transactions have been eliminated in consolidation.
The Company purchases, develops, owns, and operates natural gas gathering
pipeline systems and processing plants and related facilities in the
southwestern states of Texas, New Mexico, Oklahoma and Louisiana, both
internally and through joint ventures. The Company also owns a local natural
gas distribution company in Oklahoma and conducts oil and gas development and
production activities, primarily in Louisiana.
(2) Acquisitions
Effective March 1, 1996, GPC acquired all of the outstanding common stock
of Venture Resources, Inc. ("Venture") for $1,300,000 in cash. Effective May
1, 1996, GPC also acquired the remaining partnership interest in a gas
gathering system in Oklahoma for $100,000 in cash. Venture's assets include
gas gathering systems in Louisiana, Texas and Oklahoma consisting of 50 miles
of various size pipe and related rights of way, easements and other
facilities. The purchase was accounted for using the purchase method of
accounting and the acquisition cost was equal to the fair value of the assets
acquired. The acquisitions were financed using $750,000 of proceeds from the
issuance of Series N Preferred Stock and the issuance of bridge loans in the
amount of $650,000.
Effective July 1, 1996, the Company acquired additional oil and gas working
interests in the South Lake Arthur Field in Louisiana. The purchase price of
$3,371,400 was provided by cash generated from operations of Castex LP and
additional funds
<PAGE>
advanced under the Company's bank credit facility initiated in January 1996.
These working interests were in the same wells in which interests were purchased
in January 1996.
Assuming the acquisitions noted above occurred at the beginning of fiscal
1995, the pro forma consolidated results of operations for the three months
and six months ended August 31, 1996 and 1995 would be as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
THREE SIX THREE SIX
MONTHS MONTHS MONTHS MONTHS
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $6,379,700 $13,314,700 $3,541,200 $6,616,800
Net Earnings (182,500) 183,000 199,100 305,700
Loss applicable to common stock (863,400) (1,845,200) (401,000) (845,700)
Loss per common share (.03) (.07) (.02) (.03)
</TABLE>
(3) Notes Payable
Notes payable consists of the following at August 31, 1996.
Bank $ 150,000
Bridge loans 723,600
Other 96,100
-----------
$969,700
-----------
-----------
On March 27, 1996, the Company issued a 11% promissory note for $275,000
due on August 15, 1996. Interest is payable on the maturity date in cash, or at
the election of the holder, in common stock valued at $.35 per share. The
Company issued 78,750 shares as a commitment fee for the loan. The balance of
$73,600 at August 31, 1996, was extended to September 9, 1996, and was repaid
with funds obtained from a working capital loan (See below).
<PAGE>
On May 31, 1996, the holder of a $650,000 promissory note issued in return
for a bridge loan, agreed to extend the principal payment date until February
28, 1997. The Company issued 250,000 shares of common stock in connection with
such extension and will amortize the cost over the remaining period of the note.
On August 30, 1996, the Company executed a promissory note with Intrust
Bank in the amount of $150,000. The note bears interest at the rate of 9.25%
and is due October 31, 1996. The proceeds of the note were used to provide a
deposit for gas purchases on one of the Company's delivery systems.
(4) Long-term Debt
Long-term debt at August 31, 1996, consists of the following:
Bank credit agreement $12,064,800
Two-year convertible notes 554,200
Shareholders (See Note 8) 150,000
Officers and Directors 160,000
Other 540,000
-----------
13,469,000
Less Current Maturities 2,826,300
-----------
$10,642,700
-----------
-----------
In July 1996, the Company increased its borrowings by $3,371,400 under
the bank credit agreement to purchase additional interests in the South Lake
Arthur field. The Company also issued two-year convertible notes in the
amount of $554,200, the proceeds of which were used to repay bridge loans
issued in connection with the acquisition of Venture Resources, Inc.
Eighty-seven percent of the common stock of Venture has been pledged as
collateral for these notes.
The Company issued a promissory note to an investment banker in the
amount of $200,000 in April 1996 in consideration of fees due under a
financing agreement. Payments of $9,200 are due monthly over a twenty-four
month period.
As more fully described in Note 5, the Company issued a promissory note
for the repurchase of Series C Preferred Stock.
(5) Sponsorship Agreement
The Company had a sponsorship agreement with Pipeline Capital, Inc. ("PCI")
whereby PCI raised funds and assisted the Company in acquiring properties. For
these services, the agreement provided for an "Exit Amount" due PCI five or
seven years from the date of the agreement. Series C Preferred Stock was issued
to PCI to evidence this Exit Amount. The Company and PCI disagreed on the
calculation of the Exit Amount and the continued involvement of PCI in obtaining
capital and securing properties in light of changes in the Company's operations.
Therefore, on May 6, 1996, the Company and PCI entered into a Settlement and
Purchase Agreement which provides for the following:
- The Company repurchased the 56.5 shares of Series C Preferred Stock
owned by PCI, representing its right to receive the Exit Amount and
the 10% interest in defined net operating cash flows for $480,000
represented by a promissory note requiring payments of $10,000 per
month commencing July 1, 1996 and ending June 1, 2000. The Company
may, at its option, prepay all of the note at a discount rate of 8%.
<PAGE>
- PCI executed a new promissory note in the amount of $278,728 plus
interest at 7% per annum representing all advances to PCI to date.
All principal and interest on this note will be offset against the
amounts which are payable to PCI upon a "Payment Event" under the
Series O Preferred Stock, described below.
- The Company issued to PCI one share of its Series O Preferred Stock
which is non-voting and has no dividend rights. Upon the following
described events, payments will be made to PCI as described below:
1) In the event of the merger of the Company where it is not
the surviving corporation, the sale of all, or substantially
all, of its assets or the sale or exchange of a majority or
more of the outstanding common stock, PCI shall be entitled
to receive 10% of the consideration realized in the
transaction.
2) In the event of the liquidation and dissolution of the
Company after payment of all debts and obligations senior to
the Series O Stock and any distributions required to be made
to the holders of the Series G Preferred Stock, PCI shall
receive a payment equal to 10% of the remaining assets of
the Company.
3) If neither of the events described in (1) or (2) above have
occurred by July 1, 2000, the Company and PCI will agree
upon an investment banking or appraisal firm to value the
Company and PCI shall receive an amount equal to 10% of the
fair market value appraisal. The Company must pay $250,000
at closing, any remaining balance up to $500,000 within 12
months after closing, and if there is any remaining balance,
half will be paid within 24 months of closing. Any balances
bear interest at the rate of 8% per annum.
In the event the Company pays less than $5,000 on any
monthly payment under the $480,000 promissory note described
above and has failed to pay any remaining amount within 30
days, PCI may either accelerate all remaining payments under
the note or shall have a one time right to increase the 10%
amounts described in subparagraphs (1) through (3) above to
20%. Each of the events in subparagraphs (1) through (3)
above constitute a Payment Event and all principal and
interest remaining due under the $278,728 PCI note shall be
offset against those amounts.
- The Company has agreed to consider on a property-by-property basis,
engaging PCI to act as a finder and complete all reasonable and
necessary due
<PAGE>
diligence on future property acquisitions and to pay fees based on a
formula for all such properties actually acquired.
As a result of this settlement the Company recorded, during the first
quarter, a charge to earnings of $693,000. This charge includes the discounted
present value of the note payable to PCI for the purchase of Series C Preferred
Stock and the amount of the note receivable from PCI described above. No
external appraisal of the Company has been performed, however, the amount
represents the Company's estimate of the value of Series O Preferred Stock
issued to PCI. Prospectively, the Company will adjust the Series O Preferred
Stock value through charges to earnings for future changes in the estimated fair
value of the Company.
(6) Loss on Guymon Pipeline
On September 26, 1996, the Company's subsidiary, Gateway Pipeline
Company, executed a Letter of Intent to sell the Guymon Pipeline in Texas
County, Oklahoma for $575,000 in cash. The closing is scheduled for November
1, 1996. As a result, the Company recorded a $200,000 loss in the Statement of
Operations for the difference in the anticipated net proceeds from the sale
and the carrying cost of the asset. The original carrying cost included
$140,000 of contingent finder's fees which may be recoverable after the asset
is sold. The Company is also seeking to recover damages of approximately
$100,000 from the previous owner of the property.
Any recovery of finder's fees and damages will be recognized when
received.
(7) Common Stock
Effective July 25, 1996, the Company restated its Articles of
Incorporation and increased the common stock authorized for issuance from
30,000,000 shares to 75,000,000 shares.
(8) Subsequent Events
On September 27, 1996, the Company obtained a working capital Line of
Credit from Intrust Bank with maximum borrowings of $400,000. Such line
bears interest at the rate of 9.25% and is due September 27, 1997. The Line
of Credit is collateralized by the Company's ownership in the El Paso system
and is guaranteed in part by certain shareholders of the Company. In
addition, the Company also executed Promissory Notes to these certain
shareholders in the amount of $150,000. Such Promissory Notes are
non-interest bearing and mature in July 1998. The Company issued 450,000
shares of common stock to these shareholders for the guarantee of the Intrust
Bank Note and interest through July 1998. The Company also issued warrants
to purchase 450,000 shares of common stock at $.20 per share exercisable
through August 8, 1998.
Net revenues from the properties purchased with Series G Preferred Stock
proceeds were insufficient to meet the October 1, 1996 dividend payment and a
$215,000 deposit required by the supplier of gas on one of the Company's
delivery systems. Dividend payments will be resumed when net revenues from
the Series G properties are sufficient to repay the deposit.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
a) Annual Meeting held July 25, 1996.
b) The following directors were elected at the meeting and comprise all
of the directors of the Company.
L. J. Horbach
D. L. Anderson
C. A. Holtgraves
J. B. Ewing
c) The following table sets forth the matters voted upon at the meeting.
Votes Votes
For Against Abstentions
---------- ---------- -----------
i) Ratify appointment of
Grant Thornton LLP as
independent certified
public accountants. 18,018,211 2,322,076 456,017
ii) Elect the following
nominated directors.
L. J. Horbach 20,747,477 79,617
D. L. Anderson 20,747,477 79,617
C. A. Holtgraves 20,747,477 79,617
J. B. Ewing 18,488,747 2,338,247
<PAGE>
Votes Votes
For Against Abstentions
---------- ---------- -----------
iii) Amendment to Restated
Certificate of Incorporation
to increase common stock. 20,313,226 338,775 144,183
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
11 Statement re Computation of Per Share
Earnings, filed herewith.
21 Subsidiaries, filed herewith.
27 Financial Data Schedule, filed herewith.
b) Report on Form 8-K:
July 30, 1996 - Acquisition of oil and gas properties in South Lake
Arthur Field.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GATEWAY ENERGY CORPORATION
/s/ Neil A. Fortkamp
------------------------------------
Chief Financial Officer
October 14, 1996
- ------------------------
(Date)
<PAGE>
EXHIBIT 11
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
August 31 August 31 August 31 August 31
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 30,231,315 25,986,081 28,745,972 25,860,931
ADD SHARES ISSUABLE PURSUANT TO WARRANT
AGREEMENTS LESS SHARES ASSUMED
REPURCHASED AT THE AVERAGE MARKET PRICE 98,444 (1) 21,917 (1) 99,617 (1) 21,741 (1)
ADD SHARES ISSUABLE ASSUMING CONVERSION
OF SERIES C PREFERRED STOCK INTO
COMMON STOCK 0 140,625 (1) 0 (1) 140,625 (1)
ADD SHARES ISSUABLE PURSUANT TO STOCK
OPTIONS LESS SHARES ASSUMED REPURCHASED
AT THE AVERAGE MARKET PRICE 0 (1) 191,930 (1) 8,150 (1) 188,917 (1)
---------- ---------- ---------- ----------
TENTATIVE NUMBER OF SHARES FOR COMPUTATION
OF PRIMARY EARNINGS PER SHARE 30,329,759 26,340,553 28,853,739 26,212,214
ADD ADDITIONAL SHARES ISSUABLE PURSUANT TO
WARRANT AGREEMENTS LESS SHARES ASSUMED
REPURCHASED AT THE HIGHER OF THE PERIOD
END OR AVERAGE MARKET PRICE 0 180 0 90
ADD ADDITIONAL SHARES ISSUABLE PURSUANT TO
STOCK OPTIONS LESS SHARES ASSUMED
REPURCHASED AT THE HIGHER OF THE PERIOD
END OR AVERAGE MARKET PRICE 0 3,070 0 1,535
ADD ADDITIONAL DILUTIVE SHARES ISSUABLE
ASSUMING CONVERSION OF SERIES B, G, J,
K, L, M, N & A PREFERRED STOCK INTO
COMMON STOCK 48,703,024 38,567,623 45,194,733 37,295,782
---------- ---------- ---------- ----------
TENTATIVE NUMBER OF SHARES FOR COMPUTION
OF FULLY DILUTED EARNINGS PER SHARE 79,032,783 64,911,426 74,048,472 63,509,621
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LOSS APPLICABLE TO COMMON STOCK ($875,410) ($437,982) ($1,929,208) ($942,706)
ADD PROVISION FOR PREFERRED DIVIDENDS
RELATING TO CONVERTIBLE PREFERRED STOCK 680,926 574,054 1,335,213 1,115,390
---------- ---------- ---------- ----------
NET EARNINGS FOR COMPUTATION OF FULLY
DILUTED EARNINGS PER SHARE ($194,484) $136,072 ($593,995) $172,684
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER COMMON SHARE - PRIMARY,
INCLUDING COMMON STOCK EQUIVALENTS ($0.03) ($0.02) ($0.07) ($0.04)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) NOT USED IN PRIMARY EARNINGS PER SHARE
CALCULATION AS EFFECT WOULD BE ANTIDILUTIVE.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
EXHIBIT 21-SUBSIDIARIES
COMPANY STATE PERCENT OWNED
- ------- ----- -------------
Gateway Pipeline Co. Missouri 80%
Gateway Energy Marketing Texas 100%
Venture Resources, Inc. Texas 100%
Castex Energy, Inc. Texas 60%
Fort Cobb Oklahoma Irrigation
Fuel Authority Oklahoma 99%
Shoreham Gathering Company Nebraska 80%
Ozark Natural Gas Company Missouri 100%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> AUG-31-1996
<CASH> 1,546,900
<SECURITIES> 0
<RECEIVABLES> 4,956,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,242,600
<PP&E> 29,049,200
<DEPRECIATION> (2,874,600)
<TOTAL-ASSETS> 34,235,100
<CURRENT-LIABILITIES> 8,882,000
<BONDS> 10,642,700
8,313,800
9,400
<COMMON> 327,100
<OTHER-SE> 4,498,100
<TOTAL-LIABILITY-AND-EQUITY> 34,235,100
<SALES> 12,604,000
<TOTAL-REVENUES> 12,604,000
<CGS> 7,251,600
<TOTAL-COSTS> 10,532,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 695,300
<INCOME-PRETAX> 126,300
<INCOME-TAX> 27,300
<INCOME-CONTINUING> 99,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,000
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
