<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 May 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
-------------------
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 June 30, 1996 the Issuer had 29,178,649 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 May 31, 1996. 5
Unaudited Consolidated Statements of Operations for
the three months ended May 31, 1996, and May 31, 1995. 7
Unaudited Consolidated Statements of Cash Flows for
the three months ended May 31, 1996, and May 31, 1995. 8
Notes to Consolidated Financial Statements 9
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
The following table sets forth information for the three months ended May
31, 1996 and 1995:
<TABLE>
<CAPTION>
Increase
1996 1995 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Operating Revenues $6,107,700 $2,375,600 $3,732,100
Operating Margin 1,777,600 513,400 1,264,200
Depreciation, Depletion and Amortization 640,600 161,200 479,400
General and Administrative 488,200 363,600 124,600
Other Income (Expense) (334,300) 50,200 (384,500)
Net Earnings 293,500 36,600 256,900
Loss Applicable to Common Stock (1,053,800) (504,700) (549,100)
</TABLE>
GENERAL. Natural gas prices as reflected by monthly NYMEX and El Paso
index prices have increased significantly in the current quarter compared to the
prior year. NYMEX and El Paso monthly index prices averaged $2.58 and $1.90
respectively, compared to $1.56 and $1.26, respectively, in the prior year.
This has resulted in increased throughput on some of the Company's systems and
has also resulted in increased drilling and rework activity. Natural gas prices
have remained strong through the summer months and are expected to remain steady
for the remainder of the fiscal year.
<PAGE>
OPERATING REVENUES. Operating revenues increased $3,732,100 over the
prior year period. Castex Energy 1995 LP, 71% owned by the Company and formed
in January 1996, had revenues from sales of natural gas and oil of $928,300 in
the first quarter of 1996. Gas sales revenues increased $1,768,100 from joint
ventures due to price increases of $733,000, volume increases of $789,000, and
gas processing revenues from higher liquids volumes of $246,000. Revenues from
Fort Cobb Fuel Authority increased $195,300 due primarily to an increase in
irrigation volumes resulting from extremely dry weather during the period.
In 1996, Gateway Pipeline Company ("GPC") began marketing gas produced by
an affiliate, Castex Energy, Inc. Revenues from this marketing activity were
$409,200 in the first quarter. Also, GPC purchased Venture Resources, Inc.
effective March 1, 1996; revenues from this acquisition were $283,400 in the
first quarter.
OPERATING MARGINS. Operating margins are defined as operating revenues
less gas purchases, and operation and maintenance expenses. Operating margins
more than doubled in the first quarter of fiscal 1997 compared to fiscal 1996,
increasing by $1,264,200. The primary reason for the increase was the net
margin of $682,000 generated by Castex Energy 1995 LP which acquired producing
properties in January 1996. Also, higher gas prices and volume increases
resulted in higher operating margins of $260,000 from joint venture operations.
The remaining increase in operating margins of $322,200 resulted from the
acquisition of Venture Resources, Inc. in March 1996 and natural gas sales
during the first quarter from Company owned production.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization increased $479,400 due almost entirely to $421,000 of depletion
expenses from Castex Energy 1995 LP production in the first quarter of 1996.
The remaining increase is due to the affect of acquisitions made after May 31,
1995.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
increased $124,600 due entirely to increases in expenses at GPC and Castex
Energy, Inc., the Company's Houston based operating companies. These increases
are due to increased operating activities for acquisitions made during the prior
year and expenses incurred by Castex Energy, Inc. as the general partner of
Castex Energy 1995 LP. These operating entities also continue to incur expenses
pursuing other acquisition candidates.
OTHER INCOME (EXPENSE). Other income (expense) decreased $384,500 due
to an increase in interest expense of $333,700 and minority interest of
$54,600. Interest expense increased primarily due to $9,500,000 of debt
incurred to acquire working and revenues interests in the South Lake Arthur
Field resulting in interest expense of $208,500 for the quarter. Also,
interest expense of $29,600 was incurred for bridge loans outstanding during
the quarter ended May 31, 1996, which were used to acquire certain properties.
Interest expense also includes $67,800 for the value of common stock issued
for commitment fees or to extend the repayment of such bridge loans.
NET EARNINGS. Net earnings increased $256,900 over the prior period due
to increases in net operating margins as discussed above offset by increases in
general and administrative expense and
<PAGE>
interest expense. The provision for income taxes includes only state income
taxes since the Company continues to benefit from utilization of a net operating
loss carryforward.
LOSS APPLICABLE TO COMMON STOCK. The loss applicable to common stock
increased $549,100 over the quarter ended May 31, 1995. The increase in net
earnings of $256,900 was more than offset by an increase in the provision for
preferred dividends of $806,000. The provision for preferred 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). Preferred dividends on other
preferred stock increased $103,800 due to the issuance of Series N since May 31,
1995.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended May 31, 1996 and 1995, the Company generated
net cash flows from operating activities of $1,766,300 and ($28,600),
respectively. The Company utilized the net cash flows from operating activities
plus dividend reserves from Series N and Series G Preferred Stock to meet its
dividend obligations of $555,300 in fiscal 1996 and $415,500 in fiscal 1995.
During the first quarter of fiscal 1996, 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.
The Company used the proceeds of the above financings and funds from the
bank line of credit to invest $1,300,000 in natural gas gathering and delivery
systems and $548,700 for drilling and exploration and other capital
expenditures. At May 31, 1996, the Company had $759,500 of funds available to
repay outstanding bridge loans.
In July 1996, Castex Energy 1995 LP acquired additional working and revenue
interests in the South Lake Arthur Field for $3,495,000 using funds from the
bank line of credit. The Company does not anticipate significant capital
expenditures during the remainder of the fiscal year.
As of May 31, 1996, the Company has a working capital deficit of $1,799,700
which includes bridge loans and an acquisition line of credit totalling
$1,745,300. The bridge loans and line of credit are expected to be refinanced
or repaid by the use of cash escrowed for acquisitions, the issuance of $750,000
of Series P Preferred Stock, and the issuance of two-year promissory notes by
GPC.
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 a portion of the preferred stock, improving the operating performance of its
systems and properties and refinancing or extending the maturity dates of the
acquisition line of credit and bridge loans. The Company believes a combination
of the above will permit the Company to meet its preferred 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.
<PAGE>
As part of its effort to change its capital structure and thereby improve
its working capital position, the Company has entered into an agreement with
NationsBank whereby the bank will assist the Company in its efforts to secure
equity and debt financing to recapitalize its outstanding preferred stock and to
make a significant acquisition. NationsBank will provide financial advisory and
investment banking services, including structuring and negotiating financial
aspects of any transaction.
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 where 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
MAY 31, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,460,200
Restricted cash 115,600
Trade accounts receivable, net 5,457,000
Prepaid expenses and other assets 680,600
------------
Total current assets 8,713,400
PROPERTY AND EQUIPMENT - AT COST
Gas gathering, processing and transportation 13,167,800
Oil and gas properties, using full cost accounting 12,131,100
Office furniture and other equipment 440,000
------------
25,738,900
Less accumulated depreciation, depletion and
amortization (2,187,300)
------------
23,551,600
OTHER ASSETS
Cash escrowed for acquisitions 759,500
Note receivable - related party 285,700
Other 451,600
------------
1,496,800
------------
$ 33,761,800
------------
------------
The accompanying notes are an integral part of this statement.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1996
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,775,200
Current maturities of long-term debt 2,043,300
Accounts payable 5,992,900
Accrued expenses and other liabilities 478,400
Preferred dividends payable 223,300
------------
Total current liabilities 10,513,100
Long-term debt, less current maturities 8,066,800
Minority interests 1,060,000
Preferred stock of subsidiary 470,500
Mandatory redeemable preferred stock 8,491,000
STOCKHOLDERS' EQUITY
Preferred stock 9,600
Common stock- authorized, 30,000,000
shares of $.01 par value; issued,
28,251,224 shares 282,500
Additional paid-in capital 10,112,800
Accumulated deficit (5,244,500)
------------
Total stockholders' equity 5,160,400
------------
$ 33,761,800
------------
------------
The accompanying notes are an integral part of this statement.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended May 31
---------------------------
1996 1995
------------ ------------
OPERATING REVENUES
Natural gas sales $ 4,862,900 $ 1,886,900
Transportation 289,900 215,500
Processing and other 954,900 273,200
------------ ------------
6,107,700 2,375,600
OPERATING COSTS AND EXPENSES
Cost of natural gas purchased 3,469,500 1,341,200
Operation and maintenance 860,600 521,000
General and administrative 488,200 363,600
Depreciation and depletion 640,600 161,200
------------ ------------
5,458,900 2,387,000
------------ ------------
Operating profit 648,800 (11,400)
OTHER INCOME (EXPENSE)
Interest income 29,800 30,300
Interest expense (333,700) (4,300)
Minority interests (30,400) 24,200
------------ ------------
(334,300) 50,200
------------ ------------
Earnings before income taxes 314,500 38,800
Income taxes 21,000 2,200
------------ ------------
NET EARNINGS 293,500 36,600
Provision for preferred dividends,
including amortization of Series G
offering costs of $120,500 and $114,300,
respectively, and Series C redemption cost of
$693,000 in 1996 (Note 4). 1,347,300 541,300
------------ ------------
Loss applicable to common stock $ (1,053,800) $ (504,700)
------------ ------------
------------ ------------
Loss per common share $ (0.04) $ (0.02)
------------ ------------
------------ ------------
Number of shares used in
computing the loss per
common share 27,335,744 25,860,200
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended May 31
---------------------------
1996 1995
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities-
Net earnings $ 293,500 $ 36,600
Adjustments to reconcile net earnings to net
cash provided by operating activities-
Depreciation, depletion and amortization 640,600 161,200
Amortization of deferred income - (10,800)
Minority interest in net income (loss) of
subsidiaries 30,400 (24,300)
Compensation accrued under stock award plans (22,200) -
Stock issued for fees and interest 67,800 -
Increase (decrease) in cash and cash
equivalents resulting from changes in-
Trade accounts receivable (1,415,200) 48,500
Prepaid expenses and other current assets (517,000) (43,600)
Accounts payable 2,370,500 (84,100)
Accrued expenses and other liabilities 317,900 (112,100)
------------ ------------
Net cash provided by operating activities 1,766,300 (28,600)
------------ ------------
Cash flows from investing activities-
Capital expenditures (548,700) (497,300)
Proceeds from sale of property - 11,400
Acquisition of businesses, net of cash
acquired of $79,900 in 1996. (1,262,400) (36,900)
Advances on notes receivable (7,000) (12,000)
Payment of note receivable - 150,000
Other 36,700 (39,000)
------------ ------------
Net cash used in investing activities (1,781,400) (423,800)
------------ ------------
Cash flows from financing activities-
(Increase) decrease in escrowed cash (69,300) 50,600
Payments on borrowings (999,000) (17,900)
Proceeds from borrowings 1,157,500 -
Redemption of preferred stock (73,300) -
Proceeds from sale of preferred stock 1,442,200 848,600
Preferred dividends paid (555,300) (415,500)
------------ ------------
Net cash provided by financing activities 902,800 465,800
------------ ------------
Net change in cash and cash equivalents 887,700 13,400
Cash and cash equivalents at beginning of period 1,572,500 337,900
------------ ------------
Cash and cash equivalents at end of period $ 2,460,200 $ 351,300
------------ ------------
------------ ------------
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. Such bridge loans will be repaid by the issuance of permanent
two-year promissory notes to be issued by GPC.
Assuming the acquisitions noted above, and the acquisitions of a) Castex
Energy 1995 LP in January 1995, b) Shoreham Gathering Company in December
1995, and c) Guymon Pipeline July 1995, occurred at the beginning of fiscal
1995, the proforma consolidated results of operations for the first quarter
of fiscal 1995 would be as follows:
Revenues $3,749,800
Net Earnings 268,000
Loss applicable to common stock (397,700)
Loss per common share (.02)
<PAGE>
(3) Notes Payable
Notes payable consist of the following at May 31, 1996.
Acquisition line of credit $ 510,900
Bridge loans 1,215,200
Other 49,100
-----------
$1,775,200
-----------
-----------
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 has
been reduced to $190,200 at May 31, 1996, with proceeds from the sale of the
Venture Units (See below).
On March 27, 1996, the Company issued various 11% promissory notes due
April 1, 1997, totaling $375,000. The Company issued 100,000 shares of common
stock and warrants to purchase 1,500,000 shares at $.25 per share as a
commitment fee for the loan. In June 1996, the holders of these promissory
notes elected to convert such notes into 36 Venture Units currently being issued
by GPC. Each Venture Unit consists of a Convertible Promissory Note of $10,196,
1,153 shares of the Company's common stock and warrants to purchase 10,196
shares of the Company's common stock for $.26 per share for a period of 24
months. The Promissory Note is convertible into the Company's common stock at
any time at a rate of $.40 per share.
The Company has pledged 87% of the common stock of Venture Resources, Inc.
as collateral for the notes.
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.
(4) 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
<PAGE>
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:
o 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%.
o 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.
o 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
<PAGE>
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.
o 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 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.
(5) Series N Preferred Stock
On May 31, 1996, the Company terminated the sale of the Series N Preferred
Stock. Through that date, the Company had raised $5,601,000, before offering
and issuance costs, since the initial sale in February 1995. The Company has
determined that other sources of capital should be pursued to finance its growth
and expansion.
(6) Subsequent Events
Effective July 1, 1996, the Company acquired additional oil and gas working
and revenue interests in the South Lake Arthur Field in Louisiana. The purchase
price of $3,495,000 was provided by drawing additional funds under the Company's
bank credit facility initiated in January 1996. The purchase price is subject
to certain post closing adjustments.
In July 1996, the Company entered into an agreement with NationsBank
whereby NationsBank will, for an exclusive period of six months, assist the
Company in its efforts to secure financing for a) a yet to be determined
acquisition and b) recapitalization of the Company's preferred stock.
NationsBank will provide financial advisory and investment banking services,
including structuring and negotiating financial aspects of any transaction.
Fees for the above services include amounts based on a percentage of the
financing acquired plus a fixed monthly fee.
<PAGE>
EXHIBIT 11
GATEWAY ENERGY CORPORATION AND SUBSIDARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
-------------------------
May 31 May 31
1996 1995
----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 27,335,744 25,735,781
ADD SHARES ISSUABLE PURSUANT TO WARRANT
AGREEMENTS LESS SHARES ASSUMED
REPURCHASED AT THE AVERAGE MARKET PRICE 94,396 (1) 11,844 (1)
ADD SHARES ISSUABLE ASSUMING CONVERSION
OF SERIES C PREFERRED STOCK INTO
COMMON STOCK 0 140,625 (1)
ADD SHARES ISSUABLE PURSUANT TO STOCK
OPTIONS LESS SHARES ASSUMED REPURCHASED
AT THE AVERAGE MARKET PRICE 16,299 (1) 129,606 (1)
----------- -----------
TENTATIVE NUMBER OF SHARES FOR COMPUTATION
OF PRIMARY EARNINGS PER SHARE 27,446,439 26,017,856
ADD ADDITIONAL SHARES ISSUABLE PURSUANT TO
WARRANT AGREEMENTS LESS SHARES ASSUMED
REPURCHASED AT THE HIGHER OF THE PERIOD
END OR AVERAGE MARKET PRICE 0 0
ADD ADDITIONAL DILUTIVE SHARES ISSUABLE
ASSUMING CONVERSION OF SERIES B, G, J,
K, L, M, N & A PREFERRED STOCK INTO
COMMON STOCK 46,825,329 36,023,941
----------- -----------
TENTATIVE NUMBER OF SHARES FOR COMPUTION
OF FULLY DILUTED EARNINGS PER SHARE 74,271,768 62,041,797
----------- -----------
----------- -----------
LOSS APPLICABLE TO COMMON STOCK FOR
PURPOSES OF COMPUTING PRIMARY EARNINGS
PER SHARE ($1,053,800) ($504,724)
ADD PROVISION FOR PREFERRED DIVIDENDS
RELATING TO CONVERTIBLE PREFERRED STOCK 654,287 541,336
----------- -----------
NET EARNINGS FOR COMPUTATION OF FULLY
DILUTED EARNINGS PER SHARE $293,514 $36,612
----------- -----------
----------- -----------
EARNINGS PER COMMON SHARE - PRIMARY,
INCLUDING COMMON STOCK EQUIVALENTS ($0.04) ($0.02)
----------- -----------
----------- -----------
(1) NOT USED IN PRIMARY EARNINGS PER SHARE
CALCULATION AS EFFECT WOULD BE ANTIDILUTIVE.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
EXHIBIT 21-SUBSIDIAIRES
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> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 2,575,800
<SECURITIES> 0
<RECEIVABLES> 5,457,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,713,400
<PP&E> 25,738,900
<DEPRECIATION> 2,187,300
<TOTAL-ASSETS> 33,761,800
<CURRENT-LIABILITIES> 10,513,100
<BONDS> 8,066,800
8,491,000
9,600
<COMMON> 282,500
<OTHER-SE> 4,868,300
<TOTAL-LIABILITY-AND-EQUITY> 33,761,800
<SALES> 4,862,900
<TOTAL-REVENUES> 6,107,700
<CGS> 3,469,500
<TOTAL-COSTS> 4,970,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 333,700
<INCOME-PRETAX> 314,500
<INCOME-TAX> 21,000
<INCOME-CONTINUING> 293,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293,500
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
