<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, 1997
[ ] 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, 1997 the Issuer had 14,338,500 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, 1997. 8
Unaudited Consolidated Statements of Operations for
the three months ended May 31, 1997, and May 31, 1996. 10
Unaudited Consolidated Statements of Cash Flows for
the three months ended May 31, 1997, and May 31, 1996. 11
Notes to Consolidated Financial Statements 13
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, 1997 and 1996:
<TABLE>
<CAPTION>
Increase
1997 1996 (Decrease)
---------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues $2,964,700 $ 5,079,300 $(2,114,600)
Operating Margin 566,300 927,600 (361,300)
Depreciation, Depletion and Amortization 227,800 219,500 8,300
General and Administrative 319,900 367,000 (47,100)
Other Income (Expense) 44,800 (26,600) 71,400
Net Earnings 60,400 293,500 (233,100)
Income (Loss) Applicable to Common Stock 60,400 (1,053,800) 1,114,200
</TABLE>
GENERAL. Natural gas prices as reported in Inside F.E.R.C.'s Gas
Market Report for Henry Hub and El Paso Permian Basin index prices have
decreased in the current quarter compared to the prior year. Henry Hub and
El Paso monthly index prices averaged $1.93 and $1.69 respectively, compared
to $2.58 and $1.90, respectively, in the prior year. Although natural gas
prices are somewhat weaker in this
1
<PAGE>
period, they are stable enough to provide producers adequate prices to
encourage production and development. Natural gas prices have increased in
recent months to levels which approximate prior year prices.
OPERATING REVENUES. Operating revenues decreased $2,114,600 from the
prior year period. The revenue decrease was primarily due to i) the loss of
a major producer on one of the Company's joint venture systems, ii) cool wet
weather in the Fort Cobb distribution area and iii) discontinuance of the
Company's gas marketing activities. Revenues were also adversely affected by
the decline in gas prices and volume declines on several of the Company's
joint venture gathering systems.
OPERATING MARGINS. Operating margins decreased $361,300 from the prior
year period. The decrease is attributable to lower revenues and reduced
transportation margins on one of the Company's joint venture systems.
Operating expenses on joint venture systems were slightly higher in 1997.
Operating margins were also adversely affected by reduced retail volumes in
Caddo County and reduced margins on gas sold. The reduced margins were the
result of line losses due to two significant line breaks and higher purchase
prices paid to producers.
DEPRECIATION, DEPLETION AND AMORTIZATION. The increase of $8,300 is the
result of higher depletion charges on the Company's interests in several
producing gas wells due to changes in allocating the total cost pool.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative
expenses decreased $47,100 from the prior year quarter. The decrease
reflects management's program initiated in 1996 to reduce general and
administrative costs throughout the Company. Reductions from discontinuing
the Gateway Pipeline office and the sale of Castex Energy in October 1996
however, were offset by increases in corporate expenses incurred in
connection with building an in-house organization capable of operating and
administering properties currently managed and operated by joint venture
partners.
OTHER INCOME (EXPENSE). Other income increased $71,400 as a result of
higher equity earnings from Castex LP and reduced interest expense. Interest
expense reduction was the result of high cost short-term financing and
extension of bridge loans in the first quarter of fiscal 1997. The current
quarter includes $31,400 of interest expense related to the subordinated
notes issued in the Recapitalization.
NET EARNINGS. Net earnings decreased $233,100 from the first quarter
in fiscal 1996. The decrease in operating margins was offset by decreases in
general and administrative expenses, an increase in equity earnings of
partnership and a reduction in interest expense.
INCOME (LOSS) APPLICABLE TO COMMON STOCK. Income applicable to common
stock increased $1,114,200 from a loss of $1,053,800 in the first quarter of
fiscal 1997. The change is due to a decrease in net earnings of $233,100
offset by a reduction in the provision for preferred stock dividends. The
provision in the first quarter of fiscal 1997 was $1,347,300, including
$693,000 related to the redemption of Series C stock. There is no provision
for preferred dividends in the first quarter of fiscal 1998; all preferred
stocks were eliminated, effective March 1, 1997 in connection with the
Recapitalization.
2
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company substantially improved its financial condition with the
completion of the Recapitalization in the first quarter of fiscal 1998.
Monthly cash requirements of approximately $175,000 for preferred dividends
have been eliminated and the increase in monthly interest for the
subordinated notes is only $9,800. The Company's debt to total
capitalization is approximately 15% at May 31, 1997 which should provide
opportunity for the Company to increase its long-term borrowings to finance
acquisition opportunities.
The Company has in place an operating line of credit with a bank with
maximum borrowings of up to $550,000. As of May 31, 1997 the amount
available under this operating line was $386,000.
The Company has retained the services of an investment banker with
experience in helping growth oriented companies in the oil and gas industry.
The investment advisor is expected to assist the Company in obtaining
reasonably priced long-term debt or equity capital to finance its acquisition
strategies. The Company has signed a letter of intent to sell its interest
in Castex LP and its other oil and gas properties for approximately $3.5
million. The proceeds from this sale can be combined with long-term
financing to acquire properties which complement the Company's core assets.
Management believes that these proceeds and its more favorable debt/equity
ratio will allow it to obtain long-term financing on reasonable terms.
The Company generated cash flows from operations of $291,100 in the
first quarter of fiscal 1998. This cash generated was used to fund capital
expenditures of $125,200 and to reduce the amount outstanding under the
operating line of credit. The Company believes that cash generated from
operations will continue to be sufficient to meet its debt service
requirements, capital expenditures and provide equity funds for acquisitions.
FACTORS AFFECTING FUTURE RESULTS
The Company has completed a Recapitalization which eliminated the
preferred stock dividends and gave the Company much needed common equity.
This Recapitalization will allow the Company to retain cash flow for capital
expenditures for existing properties and to provide equity for significant
acquisitions. The enhanced capitalization structure should provide the
Company access to reasonably priced capital for expansion.
As discussed under "Results of Operations", the decreases in operating
revenues and operating margins were primarily related to operating results
from joint ventures. The Company, even though it is the majority owner in
most cases, does not manage the day-to-day affairs of the joint venture
properties. Accordingly, Gateway has only limited control over the operating
results of joint venture properties. The Company intends to pursue obtaining
operational management and control over properties now managed and supervised
by joint venture partners. The Company is building an organization capable of
operating and administering properties and analyzing expansion and
acquisition opportunities. It is probable that some joint venture partners
will resist this strategy which may result in extended negotiations or legal
action such as described in Part II, Item 1. There can be no assurance the
Company will be successful in gaining control of these joint venture
properties.
3
<PAGE>
The Company intends to diligently seek acquisitions which complement its
existing core assets. The Company believes that such acquisition
opportunities exist and that the Recapitalization will allow it to obtain the
necessary capital to finance such acquisitions. However, there are many
companies participating in this segment of the industry, most with resources
greater than the Company. It is difficult to predict the prices of the
assets and whether the Company can successfully compete with others for these
properties.
The Company's operations are also affected by factors outside its
control, including natural gas prices and weather. Natural gas prices affect
the willingness of producers to invest funds to enhance production and
therefore affects the volumes transported through the systems. Current
natural gas prices are generally high enough to encourage increased
development and drilling. There is no assurance that prices will continue to
be favorable. Retail sales in Caddo County depend to a great extent on the
weather, particularly precipitation during the summer growing season. Thus
far in 1997 natural gas usage for irrigation is generally less than normal
due to wet and cool conditions.
4
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
On June 20, 1997 Shoreham Pipeline Company ("Shoreham"), the
Company's joint venture partner with respect to fifteen of its
operating properties, filed an action in District Court in
Houston, Harris County, Texas alleging: (i) the Company had
breached an oral agreement to sell two of the joint venture
properties to Shoreham for an amount of $2,300,000; (ii) the
Company had failed to reimburse Shoreham for $700,000 of claimed
office expenses pursuant to the various joint venture agreements
under which Shoreham manages the properties; and (iii) that the
Company be restrained from removing Shoreham as the manager of
the properties under the joint venture agreements and
subsequently assuming management of the properties.
Shoreham seeks to have the Court: (i) issue a temporary
injunction preventing the Company from taking any action to
assume management over any of the joint venture properties; (ii)
issue a declaratory judgment order that the Company has no right
or authority to replace Shoreham as manager of any of the
properties; (iii) specifically enforce the alleged oral contract
for the sale of the two properties for $2,300,000; and (iv) enter
judgment against the Company for unspecified damages, punitive
damages, costs and expenses.
The Company, on June 30, 1997, filed an Answer denying all of
Shoreham's claims and setting forth affirmative defenses that the
alleged oral contract for the transfer of the two properties is
barred by the statute of frauds and that any other relief sought
by Shoreham is barred through the doctrines of waiver, estoppel,
ratification and unclean hands. Also, on June 30, 1997, the
Company filed a counterclaim against Shoreham alleging that
Shoreham, as the manager of the joint ventures, breached its
fiduciary duties with respect to the Company as its joint venture
partner, engaged in breach of contract, negligence, acts of self
dealing, misappropriation and conversion of joint venture assets,
fraud, fraudulent inducement and negligent misrepresentation.
The Company also alleges promissory estoppel and constructive
trust theories. In addition, the Company seeks an equitable
accounting for all profits and other property allegedly misused
or misappropriated by Shoreham. As part of the counterclaim, the
Company filed a separate request for the appointment of a
receiver over the assets and operation of all of the joint
venture properties pending trial on the merits.
No further pleadings have been filed nor discovery taken in the
matter. The properties in question represent approximately 50%
of the operating properties of the Company. The Company believes
that it has good and valid causes of action against Shoreham and
valid defenses against Shoreham's claims and allegations. The
Company intends to vigorously and forcefully defend itself in
this action and pursue its counterclaims. The Company and its
counsel believe that if the receiver is appointed for the
properties, such appointment will not have an adverse effect on
the Company's ability to derive operating distributions from the
properties to the extent such funds are otherwise available.
Following the filing of the Company's responsive pleadings,
counterclaims and requests for receiver, the parties have entered
into discussions to resolve the litigation. The Company
5
<PAGE>
tendered to Shoreham a draft of a Purchase and Sale and Exchange
Agreement pursuant to which Shoreham would acquire a 100% interest in
certain of the properties, the Company would acquire a 100%
interest in the remaining properties, the joint ventures would be
dissolved and the Company and Shoreham would not have further
business dealings. It is unknown at this time whether the
parties can reach an agreement with respect to the terms and
conditions of such an arrangement.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
On March 20, 1997, through a Solicitation of Consents of Common
Stockholders (in lieu of a proxy), the Company submitted to its
shareholders for approval a resolution to increase the authorized
common stock from 10,000,000 shares to 17,500,000 shares. The
solicitation was completed on April 28, 1997, as follows:
For 1,024,483
Against 6,111
Abstain 9,256
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
11 Statement re Computation of Per Share Pg 18
Earnings, filed herewith.
21 Subsidiaries, filed herewith. 19
27 Financial Data Schedule, filed herewith. 20
6
<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
____July 18, 1997____
(Date)
7
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, 1997
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 252,200
Restricted cash 2,100
Trade accounts receivable, less allowance for
doubtful accounts of $15,100 2,018,700
Inventories 54,100
Prepaid expenses and other assets 390,800
-----------
Total current assets 2,717,900
Property and Equipment -- At Cost
Gas gathering, processing and transportation 11,992,700
Office furniture and other equipment 303,700
-----------
12,296,400
Less accumulated depreciation, depletion
and amortization (2,029,400)
-----------
10,267,000
Other Assets
Assets held for sale 3,124,800
Equity investment in partnership 401,100
Other 261,500
-----------
3,787,400
-----------
$16,772,300
-----------
-----------
8
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -- CONTINUED
May 31, 1997
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 227,300
Current maturities of long-term debt 185,400
Accounts payable 1,757,200
Accrued expenses and other liabilities 254,800
-----------
Total current liabilities 2,424,700
Long-term Debt, less current maturities 2,124,000
Minority Interests 181,100
Stockholders' Equity
Common stock -- authorized, 17,500,000 shares
of $.25 par value; issued, 14,338,500 shares 3,582,600
Additional paid-in capital 15,417,900
Accumulated deficit (6,958,000)
-----------
12,042,500
-----------
$16,772,300
-----------
-----------
The accompanying notes are an integral part of this statement.
9
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months ended May 31
-------------------------
1997 1996
---------- -----------
Operating revenues
Natural gas and oil sales $2,625,800 $4,343,900
Transportation and processing 333,600 670,700
Other 5,300 64,700
---------- -----------
2,964,700 5,079,300
Operating costs and expenses
Cost of natural gas purchased 1,826,600 3,469,500
Operation and maintenance 571,800 682,200
Depreciation, depletion and amortization 227,800 219,500
General and administrative 319,900 367,000
---------- -----------
2,946,100 4,738,200
---------- -----------
Operating profit 18,600 341,100
Other income (expense)
Equity in earnings of partnerships 121,100 94,900
Interest income 3,000 13,100
Interest expense (82,700) (125,200)
Minority interests 3,400 (9,400)
---------- -----------
44,800 (26,600)
---------- -----------
Earnings before income taxes 63,400 314,500
Income taxes 3,000 21,000
---------- -----------
Net earnings 60,400 293,500
Provision for preferred dividends - 1,347,300
---------- -----------
Income (loss) applicable to common stock $ 60,400 $(1,053,800)
---------- -----------
---------- -----------
Income (loss) per common share $ 0.004 $ (0.95)
---------- -----------
---------- -----------
Weighted average common shares outstanding 14,059,400 1,111,400
---------- -----------
---------- -----------
The accompanying notes are an integral part of these statements.
10
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended May 31
-------------------------
1997 1996
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
Cash flows from operating activities--
Net earnings $ 60,400 $ 293,500
Adjustments to reconcile net earnings to net
cash provided by operating activities
Equity in earnings of partnerships (121,100) (94,900)
Distributions from partnerships - 47,100
Depreciation, depletion and amortization 227,800 219,500
Compensation accrued under stock award plans - (22,200)
Stock issued for interest, fees and services - 67,800
Non-cash interest and other expense 31,000 -
Minority interest (3,400) 9,400
Increase (decrease) in cash and cash
equivalents, net of businesses acquired,
resulting from changes in:
Trade accounts receivable 777,400 (1,520,400)
Inventories 1,000 70,800
Prepaid expenses and other current assets (25,400) (304,600)
Accounts payable (599,800) 2,291,500
Accrued expenses and other liabilities (56,800) 118,000
---------- -----------
Net cash provided by operating activities 291,100 1,175,500
---------- -----------
Cash flows from investing activities --
Capital expenditures (125,200) (128,500)
Acquisitions of businesses, net of cash acquired
of $79,000 in 1996 - (1,262,400)
Conversion of Castex LP to equity method
of accounting - (1,172,800)
Advances on notes receivable -- related party - (7,000)
Other (41,000) 30,100
---------- -----------
Net cash used in investing activities $(166,200) $(2,540,600)
---------- -----------
11
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
(unaudited)
Three Months Ended May 31
-------------------------
1997 1996
---------- -----------
Cash flows from financing activities --
Increase in restricted and escrowed cash $ - $ (69,300)
Proceeds from borrowings 579,000 1,157,500
Payments on borrowings (779,200) (823,300)
Payments on note payable to officer - (17,100)
Proceeds from sale of preferred stock - 1,438,000
Retirement of preferred stock - (73,100)
Preferred dividends paid - (555,200)
Other (2,000) -
---------- -----------
Net cash provided by (used in)
financing activities (202,200) 1,057,500
---------- -----------
Net change in cash and cash equivalents (77,300) (307,600)
Cash and cash equivalents at beginning of year 329,500 1,572,500
---------- -----------
Cash and cash equivalents at end of year $ 252,200 $1,264,900
---------- -----------
---------- -----------
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest $ 66,600 $ 42,400
Income Taxes 25,700 1,000
Supplemental Schedule of Non-cash Investing and Financing Activities
On March 1, 1996 the Company acquired the outstanding stock of Venture
Resources, Inc. In conjunction with the acquisition liabilities were assumed
as follows:
Fair Value of Assets Acquired $1,371,000
Cash Paid for Assets 1,305,000
----------
Liabilities Assumed $ 66,000
----------
----------
In the first quarter of fiscal 1998, in connection with the Recapitalization,
the Company exchanged 12,398,700 shares of common stock, subordinated notes
with a fair value of $977,900 and 62,000 common stock purchase warrants for
7,770 shares of Series G mandatory redeemable preferred stock, 1 share of
Series O preferred stock and 9,424 shares of other series of preferred stock
including accrued dividends. The Company also issued 10,000 common shares
for expenses incurred in connection with the Recapitalization.
12
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Principles of Consolidation and Nature of Business
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"), and all of its wholly-owned and majority-owned
subsidiaries and joint venture investments. 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.
In October 1996 the Company sold a majority-owned subsidiary, Castex
Energy, Inc. ("Castex"). Castex, among other things, serves as the general
partner for Castex Energy 1995 L.P. ("Castex LP"). The sale of Castex
resulted in the Company no longer controlling the general partner of Castex
LP; therefore in fiscal 1997 the Company deconsolidated its 66% limited
partnership interest in Castex LP and reported such interest, beginning March
1, 1996 using the equity method of accounting. Certain reclassifications have
been made to the financial statements filed as of May 31, 1996 to reflect
this change in presentation.
The Company purchases, develops, owns, and operates natural gas
gathering pipeline systems and processing plants and related facilities in
the Gulf Coast and Southwestern states of Texas, New Mexico, Oklahoma and
Louisiana, both internally and through joint ventures with industry partners.
The Company operates a local natural gas distribution company in Oklahoma,
and through Castex LP, conducts oil and gas development and production
activities in Louisiana.
(2) Recapitalization
Effective March 1, 1997 the Company consummated a solicitation of its
preferred stockholders which provided for the restructuring of all nine
series of its preferred stock. As part of the restructuring the Company's
common stockholders authorized a one-for-twenty five reverse split and a
reduction of authorized common shares from 75,000,000 to 17,500,000
(collectively the "Recapitalization").
The objectives of the Recapitalization are to improve the Company's
financial condition, retain cash flow for required capital additions and
enhancements, facilitate the development of reasonably priced long-term
financing and allow the Company to execute its strategies for developing an
operating organization, decreasing its reliance on third-party operators and
developing its core assets through expansion and acquisition.
13
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The significant components of the Recapitalization, together with the
applicable accounting effects, are as follows:
- The Company offered to exchange $7,769,800 stated value of
the Series G mandatory redeemable preferred stock plus accrued
dividends of $505,200 for i) 1,983,200 shares of common stock,
ii) $3,069,200 of 10% subordinated notes and, iii) 155,400
common stock purchase warrants exercisable to March 1, 2002 at
$3.00 per share. Alternatively, the Series G preferred
stockholders could elect to convert their preferred stock into
6,782,800 shares of common stock as provided for in the
Certificate of Designation. Pursuant to the elections of the
Series G preferred stockholders, the Company issued $592,200 of
10% subordinated notes, 5,856,600 shares of common stock and
30,000 common stock purchase warrants and cancelled all Series G
preferred stock.
- The Company offered to exchange $9,961,500 stated value of
Series A, B, J, K, L, M, and N preferred stock plus accrued
dividends of $403,400 for i) 2,131,900 shares of common stock,
ii) $3,690,700 of 10% subordinated notes and, iii) 199,230 common
stock purchase warrants. Alternatively, the preferred
stockholders could elect to convert their preferred stock into
7,119,500 shares of common stock as provided for in the
Certificate of Designation. Pursuant to the elections of each
preferred stockholder, the Company issued $585,700 of 10%
subordinated notes, 6,292,200 shares of common stock and 32,300
common stock purchase warrants and cancelled all preferred stock
of these Series.
- The Company exchanged the Series O preferred stock held by
Pipeline Capital, Inc. ("PCI") for 214,000 shares of common stock
and canceled the promissory note of $298,700 due to the Company
by PCI.
The subordinated notes are dated March 1, 1997 with an interest rate of
10%, payable quarterly. Annual equal principal payments begin on March 1,
2000, and continue through March 1, 2004. The aggregate subordinated notes
have a 4.36% interest in the cash distributions and liquidation proceeds of
Castex LP after recovery of the Company's investment and the payment of any
related income taxes.
As a result of the Recapitalization, all preferred stocks have been
eliminated and converted or redeemed for common stock, common stock purchase
warrants and subordinated notes. In addition, $266,600 of restructuring costs
reduced paid-in capital. The following table shows the changes in
stockholders' equity and total capitalization resulting from the
Recapitalization:
14
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
February 28, 1997 May 31, 1997
----------------- ------------
Preferred dividends payable $ 960,700 $ -
Long-term debt, including
current portion 1,372,700 2,309,400
Minority interests 184,500 181,100
Preferred stock of subsidiary 358,500 -
Mandatory redeemable preferred stock 6,394,700 -
Stockholders' Equity:
Preferred stock 9,400 -
Common stock 482,400 3,582,600
Additional paid-in capital 12,334,900 15,417,900
Accumulated deficit (7,018,400) (6,958,000)
----------- -----------
Total stockholders' equity 5,808,300 12,042,500
----------- -----------
Total capitalization $15,079,400 $14,533,000
----------- -----------
----------- -----------
Common shares outstanding 1,929,800 14,338,500
----------- -----------
----------- -----------
(3) Notes Payable
Notes payable consist of the following at May 31, 1997:
Operating line of credit $164,000
Operating line of credit -- Ft. Cobb 40,000
Other 23,300
--------
$227,300
--------
--------
The Company has used operating cash flow to reduce the operating line of
credit from $316,000 at February 28, 1997 to $164,000 at May 31, 1997.
15
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(4) Long-term Debt
Long-term debt at May 31, 1997 consists of the following:
Promissory notes $ 997,600
Subordinated notes 984,900
Note payable to PCI 326,900
----------
2,309,400
Less current maturities 185,400
----------
$2,124,000
----------
----------
The subordinated notes are dated March 1, 1997 and were issued in
connection with the Recapitalization as discussed in Note 2. The notes bear
interest at 10% annually, payable quarterly. Annual equal principal payments
begin on March 1, 2000 and continue through March 1, 2004. The subordinated
notes were recorded net of discount of $193,200 which represents the
difference between the fair value and the face value of the notes. Such
discount is being amortized to interest expense using the interest method.
The subordinated notes also have an aggregate 4.36% interest in the cash
distributions of Castex LP after recovery of the Company's investment and the
payment of related income taxes. As a result of the discount and the
interest in the cash distribution of Castex LP the effective interest rate on
the subordinated notes is approximately 15%.
(5) Assets Held for Sale
On May 29, 1997 the Company signed a letter of intent to sell its oil
and gas producing interests, including its equity investment in Castex LP for
an amount in excess of current carrying value. The sale is expected to close
in August 1997 and is subject to the acquisition of additional producing
interests in the South Lake Arthur Field by Castex LP. The carrying value of
the assets held for sale as of May 31, 1997 is as follows:
Equity investment in Castex LP $2,112,700
Other oil and gas producing interests, net 1,012,100
----------
$3,124,800
----------
----------
(6) Common Stock
In connection with the Recapitalization, the Company implemented a
reverse stock split in which one share of common stock was issued for each
twenty-five shares outstanding. Per share amounts and shares outstanding for
the period ended May 31, 1996 have been adjusted to reflect this reverse
split.
16
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(7) Subsequent Event
In June 1997, Shoreham Pipeline Company ("Shoreham") filed an action in
District Court in Houston, Harris County, Texas seeking i) a temporary
injunction preventing the Company from taking any action to assume management
over any of its joint ventures managed by Shoreham; ii) a declaratory
judgment order that the Company has no right or authority to replace Shoreham
as manager; and iii) to enforce an alleged oral contract for the sale of two
joint ventures for $2,300,000. The action also seeks judgment for
unspecified damages, punitive damages, costs and expenses.
The Company has filed an Answer denying all of Shoreham's claims and
also filed a counterclaim against Shoreham alleging that Shoreham, as manager
of the joint ventures breached its fiduciary duties and engaged in breach of
contract, negligence, acts of self-dealing, fraud, fraudulent inducement and
negligent misrepresentation. As part of the counterclaim, the Company filed
a separate request for the appointment of a receiver over the assets and
operation of all of the joint ventures pending trial.
The Company believes that it has good and valid causes of action against
Shoreham and valid defenses against Shoreham's claims and allegations. The
Company intends to vigorously and forcefully defend itself in this action and
pursue its counterclaims.
Subsequent to the actions described above, the Company and Shoreham have
entered into discussions to resolve the matters. In that regard, the Company
tendered to Shoreham a draft of a Purchase and Sale and Exchange Agreement
pursuant to which Shoreham would acquire a 100% interest in certain joint
ventures and the Company would acquire a 100% interest in the remaining joint
ventures.
It is not possible at this time to predict the outcome of the legal
actions or whether the parties can reach an agreement prior to trial.
However, in management's opinion, the appointment of a receiver for the joint
ventures or the outcome of the litigation will not have an adverse affect on
the Company's financial condition or its cash flows from the properties.
17
<PAGE>
EXHIBIT 11
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year ended
-----------------------------
May 31, May 31,
1997 1996(2)
------------ ------------
<S> <C> <C>
Weighted average number of common shares
outstanding 14,059,400 1,111,400
Add net shares issuable pursuant to warrant
agreements less shares assumed repurchased
at the average market price 0 3,800(1)
Add net shares pursuant to stock options less
shares assumed repurchased at the average
market price 0 700(1)
----------- ----------
Tentative number of shares for computation of
primary earnings per share 14,059,400 1,115,900
Add additional net 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 0 1,873,000
----------- ----------
Tentative number of shares for computation
of fully diluted earnings per share 14,059,400 2,988,900
----------- ----------
----------- ----------
Loss applicable to common stock for purposes
of computing primary earnings per share $ 60,400 $(1,053,800)
Add provision for preferred dividends
relating to convertible preferred stock 0 654,300
----------- ----------
Net earnings (loss) for computation of fully
diluted earnings per share $ 60,400 $ (399,500)
----------- -----------
----------- ----------
Income (loss) per common share -- primary,
excluding common stock equivalents $ 0.004 $ (0.95)
----------- -----------
----------- -----------
</TABLE>
(1) Not used in primary earnings per share calculations as the effect
would be antidilutive.
(2) All share data reflects the retroactive effect to a one-for-twenty five
reverse split effected on March 4, 1997 to holders.
<PAGE>
EXHIBIT 21
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
Company State Percent Owned
- ------- ----- -------------
Gateway Pipeline Co. Missouri 100%
Gateway Energy Marketing Texas 100%
Venture Resources, Inc. Texas 100%
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-END> MAY-31-1997
<CASH> 254,300
<SECURITIES> 0
<RECEIVABLES> 2,033,800
<ALLOWANCES> 15,100
<INVENTORY> 54,100
<CURRENT-ASSETS> 2,717,900
<PP&E> 12,296,400
<DEPRECIATION> 2,029,400
<TOTAL-ASSETS> 16,772,300
<CURRENT-LIABILITIES> 2,424,700
<BONDS> 2,124,000
0
0
<COMMON> 3,582,600
<OTHER-SE> 8,459,900
<TOTAL-LIABILITY-AND-EQUITY> 16,772,300
<SALES> 2,625,800
<TOTAL-REVENUES> 2,964,700
<CGS> 1,826,600
<TOTAL-COSTS> 2,854,000
<OTHER-EXPENSES> 319,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,700
<INCOME-PRETAX> 63,400
<INCOME-TAX> 3,000
<INCOME-CONTINUING> 60,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,400
<EPS-PRIMARY> .004
<EPS-DILUTED> 0
</TABLE>
