<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 November 30, 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 December 31, 1996 the Issuer had 39,706,186 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 November 30, 1996. 8
Unaudited Consolidated Statements of Operations for
the three months and nine months ended November 30, 1996,
and November 30, 1995. 10
Unaudited Consolidated Statements of Cash Flows for the
nine months ended November 30, 1996, and November 30, 1995. 11
Notes to Consolidated Financial Statements 12
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
Henry Hub natural gas index prices averaged $2.13 and $2.38 for the three
months and nine months ended November 30, 1996, compared to $1.66 and $1.59 in
the comparable periods in 1995. El Paso Permian Basin index prices were also
higher reflecting continued demand for natural gas and lower storage volumes
than normal. These higher 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 January 1997 as heating degree days continue to be higher than
normal across the country.
<PAGE>
Three Months Ended November 30, 1996 Compared To November 30, 1995.
The following table sets forth information for the three months ended
November 30, 1996 and 1995:
<TABLE>
<CAPTION>
INCREAE
1996 1995 (DECREASE)
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues $ 4,977,000 $ 3,147,600 $ 1,829,400
Operating Margin 1,605,600 742,600 863,000
Depreciation, Depletion and Amortization 808,900 193,300 615,600
General and Administrative 519,100 451,600 67,500
Other Income (Expense) (601,700) 54,000 (655,700)
Net Earnings (Loss) (296,800) 127,900 (424,700)
Loss Applicable to Common Stock (963,900) (483,500) (480,400)
</TABLE>
OPERATING REVENUES. Operating revenues increased $1,829,400 or 58% over the
prior year period. Castex Energy 1995 LP ("Castex LP"), 66% owned by the Company
and formed in January 1996, had revenues from oil and gas sales of $1,409,500 in
the third quarter of 1996. Gas sales revenues from joint ventures increased
$91,900. A volume decrease of one percent was offset by price increases on
several joint venture systems. Revenues from Gateway Pipeline Company ("GPC")
operations increased $295,000 due to the purchase of Venture Resources, Inc. in
March 1996. Revenues from Fort Cobb Fuel Authority decreased $186,700 due to a
decrease in irrigation and drying volumes resulting from favorable weather
conditions.
OPERATING MARGINS. Operating margins are defined as operating revenues less
gas purchases, and operation and maintenance expenses. Operating margins
increased $863,000 or 116% over the prior year period. Castex LP generated
$1,102,800 of operating margin for the period. Operating margins from Fort Cobb
were adversely affected by higher gas purchase prices and operating expenses.
Operating margins from joint venture operations reflect reduced margins on gas
purchased and resold and legal expenses on joint venture litigation.
DEPRECIATION AND DEPLETION. Depreciation and depletion increased $615,600
due almost entirely to $585,700 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. General and administrative expenses increased
by $67,500 or 15% over the prior year period. Expenses increased at GPC and
Castex Energy, Inc. ("Castex") by $55,000, reflecting increases in personnel to
manage Castex LP and other properties acquired. Corporate expenses increased by
$10,800 due to higher accounting and legal fees.
OTHER INCOME (EXPENSE). Other income (expense) decreased $655,700
primarily due to an increase in interest expense of $386,000. Interest
expense increased because of $325,000 of interest on the bank line of credit
obtained by Castex LP and $60,000 of other interest reflecting the cost of
bridge loans and short-term notes. Other expense includes charges of $201,300
for losses incurred on the disposal of assets. The Company sold its interest
in Castex and discontinued Houston operations to reduce future general and
administrative costs. Other income (expense) also decreased $70,500 due to
the earnings of Castex LP attributable to minority interests.
<PAGE>
NET EARNINGS (LOSS). Net earnings decreased $424,700 from the prior
year resulting in a net loss of $296,800, largely as the result of higher
general and administrative costs of $67,500, and the loss on the disposal
of assets of $201,300. Net earnings were also adversely affected by favorable
weather conditions at Fort Cobb and reduced margins on gas purchased and
resold.
LOSS APPLICABLE TO COMMON STOCK. The loss applicable to common stock
increased $480,400 over the prior year period. The increase was almost entirely
due to the decrease in net earnings. The increase in preferred stock dividends
from the additional sales of Series N Preferred Stock was offset by conversions
and redemptions of the Series G Preferred Stock.
Nine Months Ended November 30, 1996 Compared To November 30, 1995.
The following summary sets forth information for the nine months ended
November 30, 1996 and 1995:
<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
------------- ------------ ------------
<S> <C> <C> <C>
Operating Revenues $ 17,581,100 $ 8,368,200 $ 9,212,900
Operating Margin 5,162,600 1,960,900 3,201,700
Depreciation, Depletion and Amortization 2,269,800 513,600 1,756,200
General and Administrative 1,584,300 1,240,800 343,500
Other Income (Expense) (1,506,300) 126,000 (1,632,300)
Net Earnings (Loss) (197,800) 300,600 (498,400)
Loss Applicable to Common Stock (2,893,200) (1,426,200) (1,467,000)
</TABLE>
OPERATING REVENUES. Operating revenues increased $9,212,900 or 110%. Of
this increase, $3,745,600 was attributable to gas and oil sales of Castex LP,
acquired in January 1996. Joint venture revenues increased $3,554,900 due to
a 4.6% increase in volumes and an increase of 48% in the average price for
natural gas. Revenues from Fort Cobb decreased $191,300 due to a reduction in
volumes sold of 23% or 52,000 MMBtu's. Retail prices to customers were
slightly higher in 1996 due to higher gas purchase prices. Gas processing
revenues increased $413,300 due to increases in throughput at the Company's
processing plants and higher liquids prices.
In 1996, GPC began marketing gas produced by an affiliate, such marketing
activities generated $1,064,000 in revenues during the current period. Also,
GPC acquired Venture Resources, Inc. in March 1996; revenues attributable to
this acquisition were $801,700 in this nine month period.
OPERATING MARGINS. Operating margins increased $3,201,700 or 163% over the
similar period in the prior year. Castex LP, acquired in January 1996,
generated operating margins of $3,058,800. Joint venture operating margins
increased $162,500 from higher volumes and prices which were partially offset
by increased operating and maintenance expenses and legal expenses to enforce
a joint venture gas purchase contract. Margins decreased at Fort Cobb by
$218,300 due to lower volumes, increased cost of gas resulting from higher
purchase prices, line losses and higher operating expenses.
<PAGE>
Operating margins from acquisitions made in 1996 by GPC increased by
$165,000 in the nine month period.
DEPRECIATION AND DEPLETION. Depreciation and depletion increased by
$1,756,200 due primarily from depletion on Castex LP of $1,602,800. Other
depreciation increases of $153,400 resulted from acquisitions made after
November 1995, and minor capital expenditures on existing properties.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
increased $343,500 due primarily to increases in costs for the Company's
Houston operations. These costs increased $297,000 as a result of increased
personnel costs to manage Castex LP and properties acquired, increased rent
and increased legal and accounting fees. Corporate expenses increased by
$46,300 largely due to increased accounting and legal fees.
OTHER INCOME (EXPENSE). Other income (expense) decreased by $1,632,300 due
primarily to an increase in interest expense on the bank line of credit for
Castex LP of $822,100. Other interest expense increased $236,300 due to costs
of bridge loans and other short-term notes. Interest expense includes the
cost of common stock issued for commitment and extension fees.
Other expenses also includes charges of $401,200 for losses incurred on the
disposal of assets. The Company sold the Guymon pipeline and its interest in
Castex and discontinued Houston operations to reduce future general and
administrative expenses to levels appropriate for properties under management.
NET EARNINGS (LOSS). Net earnings decreased $498,400 over the prior
period resulting in a net loss of $197,800. Operating margin increases were
offset by higher depreciation, higher general and administrative costs,
interest expense for Castex LP and bridge loans and the loss on the disposal
of assets.
LOSS APPLICABLE TO COMMON STOCK. The loss applicable to common stock
increased $1,467,000 over the prior year period. In addition to the decrease
in net earnings of $498,400 preferred stock dividends increased $256,800
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 6).
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended November 30, 1996 and 1995, the Company
generated net cash flow from operating activities of $1,845,500 and 65,900,
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 to the extent possible. In addition, the cash generated
from operating activities of Castex LP was used to reinvest in their drilling
program and to reduce the bank line of credit used to acquire the South Lake
Arthur interests.
<PAGE>
During the first nine 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 $739,000 through the sale of two year convertible notes. The Company
also issued promissory notes in the amount of $150,000 to certain
shareholders and obtained a $400,000 operating line of credit from an area
bank.
The Company used the proceeds from the above financings to invest $1,400,000
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 and the operating line of credit were used
to provide working capital for the Company and to make a gas purchase deposit
of $295,000.
In July 1996, Castex LP acquired additional working interests in
the South Lake Arthur Field for $3,371,400. Castex LP has also expended
$1,265,000 for drilling costs and additional prospects. Castex LP plans to
drill several additional wells in the next several months. 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 November 30, 1996, the Company had a working capital deficit of
$2,232,000 which includes bridge loans of $650,000 which are expected to be
repaid through the sale of a gas pipeline and other permanent financing. The
working capital deficit is caused largely by the current maturity portion 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 $295,000 deposit requirement with a supplier of gas on one of the
Company's delivery systems. The Company has also suspended the payment of
dividends on all other series of preferred stock effective January 1, 1997.
In November 1996, the Company retained the services of an investment advisor
to assist it in developing a plan to recapitalize the Company and improve its
balance sheet. The Board of Directors has approved a Recapitalization Plan
("Plan") which will allow the Company to eliminate its preferred dividend
requirements and improve its cash flow.
The Plan must be approved by a majority of each series of preferred stock.
The Plan, as presently contemplated, consists of a conversion in part and
redemption in part of each outstanding share of preferred stock. Each $1,000
of preferred stock will receive 1) a 10% Subordinated Debenture of $330, 2)
common stock, and 3) common stock warrants. Subsequent to acceptance of the
Plan, the preferred stockholders will own approximately 75% of the
outstanding common stock. The Plan also requires a reverse stock split of 1
share for each 25 shares of common stock which must be approved the common
stockholders. The Company expects common shareholder approval of the reverse
split by January 31, 1997, and preferred stockholder approval of the Plan by
approximately February 28, 1997.
<PAGE>
Management anticipates that annual cash flow will be increased by
approximately $1.5 million which represents the difference in dividends on
preferred stock and the interest expense on the Subordinated Debentures. In
addition, the Company has terminated its employees in Houston and entered
into a management contract which is expected to reduce general and
administrative costs by as much as $400,000 annually. The Company is also
seeking ways to reduce its reliance on joint venture partners in order to
reduce the costs associated with managing these properties.
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. Substantially all 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 net revenues that flow through to
the Company.
Over the next several months, the Company needs to reduce the cash payments
for dividends. As discussed above under "Liquidity and Capital Resources", the
Company believes the Recapitalization Plan will accomplish this objective. There
can be no assurances, however, that the Company will be successful in
implementing this Plan or that the preferred and common shareholders will
approve the Plan. 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 potential 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 effect the
Recapitalization Plan discussed above. 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 capability 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 operations
possible and the availability of appropriately priced financing to secure new
properties.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $1,545,500
Restricted cash 58,100
Trade accounts receivable, net 4,480,600
Prepaid expenses and other assets 802,100
---------
Total current assets 6,886,300
PROPERTY AND EQUIPMENT--AT COST
Gas gathering, processing and transportation 12,280,200
Oil and gas properties, using full cost accounting 16,238,800
Office furniture and other equipment 414,000
---------
28,933,000
Less accumulated depreciation, depletion and amortization (3,714,300)
---------
25,218,700
OTHER ASSETS
Note receivable--related party 293,900
Other 671,000
---------
964,900
---------
$33,069,900
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1996
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES
Notes payable $1,133,100
Current maturities of long-term debt 2,973,500
Accounts payable 3,742,000
Accrued expenses and other liabilities 720,300
Preferred dividends payable 549,400
----------
Total current liabilities 9,118,300
Long-term debt, less current maturities 10,111,500
Minority interests 1,077,400
Preferred stock of subsidiary 466,500
Mandatory redeemable preferred stock 7,809,500
STOCKHOLDERS' EQUITY
Preferred stock 9,400
Common stock- authorized, 75,000,000 shares of $.01 par 37,357,400
value; issued and outstanding, 37,357,400 shares
Additional paid-in capital 10,926,800
Accumulated deficit (6,823,100)
----------
Total stockholders' equity 4,486,700
----------
$33,069,900
----------
----------
</TABLE>
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 NINE MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
------------------------------ ----------------------------
1996 1995 1996 1995
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Natural gas sales $4,477,600 $ 2,663,300 $ 15,532,000 $ 6,951,400
Transportation 261,400 210,800 824,100 619,700
Processing and other 238,000 273,500 1,225,000 797,100
------------ ------------ ------------- -------------
4,977,000 3,147,600 17,581,100 8,368,200
OPERATING COSTS AND EXPENSES
Cost of natural gas
purchased 2,347,800 1,828,700 9,599,400 4,755,700
Operation and maintenance 1,023,600 576,300 2,819,100 1,651,600
General and administrative 519,100 451,600 1,584,300 1,240,800
Depreciation and depletion 808,900 193,300 2,269,800 513,600
---------- ------------- ------------- -------------
4,699,400 3,049,900 16,272,600 8,161,700
---------- ------------- ------------- -------------
Operating profit 277,600 97,700 1,308,500 206,500
OTHER INCOME (EXPENSE)
Interest income 47,100 26,000 106,800 73,000
Interest expense (412,000) (26,000) (1,107,400) (49,000)
Minority interests (35,500) 35,000 (104,500) 83,200
Loss on disposal of assets (201,300) 19,000 (401,200) 18,800
----------- ------------- ------------- -------------
(601,700) 54,000 (1,506,300) 126,000
----------- ------------- ------------- -------------
Earnings (Loss) before
income taxes (324,100) 151,700 (197,800) 332,500
Income taxes (27,300) 23,800 - 31,900
------------ ------------- ------------- -------------
NET EARNINGS (LOSS) (296,800) 127,900 (197,800) 300,600
Provision for preferred
dividends, including
amortization of Series G
offering costs of
$120,500, $114,300,
$361,600 and $342,800,
respectively, and Series C
redemption cost of $-0- and
$693,000 in 1996 (Note 6). 667,100 611,400 2,695,400 $ 1,726,800
------------ ------------- ------------- -------------
Loss applicable to common
stock $(963,900) $ (483,500) $ (2,893,200) $ (1,426,200)
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Loss per common share $(0.03) (0.02) $ (0.09) $ (0.06)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Number of shares used in
computing the loss per
common share 35,536,200 26,061,100 33,651,400 25,916,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</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>
NINE MONTHS ENDED
NOVEMBER 30,
--------------------------
<S> <C> <C>
1996 1995
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities-
Net earnings (loss) $ (197,800) $ 300,600
Adjustments to reconcile net earnings (loss)to net cash provided
by operating activities-
Depreciation, depletion and amortization 2,269,800 513,600
(Gain) loss on disposal of assets 401,200 (30,700)
Amortization of deferred income -- (33,300)
Minority interest in net income (loss) of subsidiaries 104,500 (83,200)
Compensation accrued under stock award plans (2,300) 30,300
Stock issued for fees and interest 115,800 31,500
Increase (decrease) in cash and cash equivalents, net of
businesses sold, resulting from changes in-
Trade accounts receivable (303,600) (286,900)
Prepaid expenses and other current assets (474,400) (399,800)
Accounts payable (274,000) 57,800
Accrued expenses and other liabilities 206,300 (34,000)
------------ ------------
Net cash provided by operating activities 1,845,500 65,900
------------ ------------
Cash flows from investing activities-
Capital expenditures (1,462,800) (924,200)
Acquisition of businesses, net of cash acquired of $79,900 in
1996 (4,833,800) (1,177,100)
Other (10,400) (43,300)
Proceeds from sale of properties 631,600 220,000
------------ ------------
Net cash used in investing activities (5,675,400) (1,924,600)
------------ ------------
Cash flows from financing activities-
(Increase) decrease in escrowed cash 747,200 412,100
Payments on borrowings (3,005,100) (58,500)
Proceeds from borrowings 6,036,800 --
Redemption of preferred stock (97,000) --
Net proceeds from sale of preferred stock 1,437,400 2,657,400
Preferred dividends paid (1,316,500) (1,363,400)
Issuance of short term notes -- 235,000
------------ ------------
Net cash provided by financing activities 3,802,800 1,882,600
------------ ------------
Net change in cash and cash equivalents (27,100) 23,900
Cash and cash equivalents at beginning of period 1,572,600 337,900
------------ ------------
Cash and cash equivalents at end of period $ 1,545,500 $ 361,800
------------ ------------
------------ ------------
</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"--See Note 7), 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.
<PAGE>
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 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
nine months ended November 30, 1996 and 1995 would be as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
------------- ------------- ------------- -------------
Revenues $ 4,977,000 $ 18,291,000 $ 3,649,300 $ 10,269,900
Net earnings (loss) (296,800) (113,800) 183,400 491,600
Loss applicable to common stock (963,900) (2,809,200) (448,000) (1,313,200)
Loss per common share (0.03) (0.08) (0.02) (0.05)
</TABLE>
(3) Notes Payable
Notes payable consists of the following at November 30, 1996.
<TABLE>
<S> <C>
Bank Operating Line of Credit $ 395,000
Bridge loan 650,000
Other 88,100
---------
$1,133,100
---------
---------
</TABLE>
On September 27, 1996, the Company executed a Promissory Note with Intrust
Bank for a maximum amount of $400,000. The note bears interest at the rate of
9.25% and is due September 27, 1997. The Company may withdraw funds against
the Note for operating expenses. As of November 30, 1996, the outstanding
balance was $395,000. The proceeds were used to provide a deposit for gas
purchases on a delivery system and other operating expenses. The Note is
secured by the Company's ownership interest in the El Paso Joint Venture and
further guaranteed up to $200,000 by certain officers and shareholders of the
Company.
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.
<PAGE>
(4) Long-term Debt
Long-term debt at November 30, 1996, consists of the following:
<TABLE>
<S> <C>
Bank credit agreement $11,674,600
Two-year convertible notes 739,200
Shareholders 150,000
Other 521,200
-----------
13,085,000
Less Current Maturities 2,973,500
-----------
$10,111,500
-----------
-----------
</TABLE>
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 $739,200, 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 6, the Company issued a promissory
note for the repurchase of Series C Preferred Stock.
(5) Sale of Guymon Pipeline
On November 1, 1996, the Company's subsidiary, Gateway Pipeline Company,
completed the sale of the Guymon Pipeline in Texas County, Oklahoma for
$575,000 in cash. As a result of the sale, the Company has recorded a
$215,500 loss in the statement of operations, $200,000 of which was recorded
in the second quarter of 1996.
(6) 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:
<PAGE>
- 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%.
- 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.
<PAGE>
- 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.
(7) Sale of Castex Energy, Inc.
Effective November 1, 1996, the Company sold its sixty percent (60%)
interest in Castex Energy, Inc. ("Castex") to the minority shareholders of
Castex in exchange for the cancellation and forgiveness of certain
obligations. The financial statements for the three months and nine months
ended November 30, 1996, include a net loss on this transaction of $57,300.
(8) Subsequent Events
On January 10, 1997, the Company sold certain pipeline properties of Venture
for $346,600 in cash. The sale will result in a gain of approximately
$60,000. The proceeds of the sale will be used to repay a portion of a bridge
loan due February 28, 1997.
Effective December 1, 1996, the Company has terminated all of the employees
of Gateway Pipeline Company. The Company has set up a reserve as of November
30, 1996, primarily for a disposal of assets associated with the termination,
in the amount of $130,000.
(9) Liquidity and Recapitalization
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 $295,000 deposit required by the supplier of gas on one of the
Company's delivery systems. The Company has also suspended the payment of
dividends on all other series of preferred stock effective January 1, 1997.
In November 1996, the Company retained the services of an investment advisor
to assist it in developing a plan to recapitalize the Company and improve its
balance sheet. The Board of Directors has approved a Recapitalization Plan
("Plan") which will allow the Company to eliminate its preferred dividend
requirements and improve its cash flow.
<PAGE>
The Plan must be approved by a majority of each series of preferred stock.
The Plan, as presently contemplated, consists of a conversion in part and
redemption in part of each outstanding share of preferred stock. Each $1,000
of preferred stock will receive 1) a 10% Subordinated Debenture of $330, 2)
common stock, and 3) common stock warrants. Subsequent to acceptance of the
Plan, the preferred stockholders will own approximately 75% of the
outstanding common stock. The Plan also requires a reverse stock split of 1
share for each 25 shares of common stock.
On January 13, 1997, the Company mailed to its common stockholders a
Solicitation of Consents of Stockholders asking the stockholders to approve
the 1 for 25 reverse split of the outstanding common stock and to reduce the
authorized common shares from 75,000,000 to 10,000,000 and the authorized
preferred shares from 1,750,000 to 10,000. The Company expects common
shareholder approval by January 31, 1997.
(10) Issuance of Common Stock
Common stock outstanding increased from 27.0 million shares on
February 29, 1996, to 37.4 million shares at November 30, 1996. This increase
was due to i) 7,820,964 shares issued in connection with the conversion of
mandatorily redeemable and other preferred stock, ii) 941,250 shares issued
in connection with guaranties, extensions and interest related to short-term
financings, iii) 1,366,766 shares issued in connection with Series N
preferred stock offering, and iv) 251,167 shares issued in connection with
the two-year convertible notes.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(b)As of January 15, 1997, the Company is in arrears on its preferred stock
dividends as follows:
DATE
AMOUNT LAST PAID
---------- ---------------
Series G $ 350,800 Sept. 1, 1996
Series N $ 56,000 Dec. 1, 1996
Other $ 113,337 Oct. 1, 1996
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
a) Solicitation of Consents in Lieu of Special Meeting dated January
13, 1997.
b) The solicitation asks shareholders to approve the following matters:
i) Reverse stock split of 1 share for 25 shares.
ii) Reduce authorized common shares from 75,000,000 to 10,000,000.
iii) Reduce authorized preferred shares from 1,750,000 to 10,000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
11 Statement of Computation of Per Share Earnings, filed herewith.
21 Subsidiaries, filed herewith.
27 Financial Data Schedule, filed herewith.
<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
January 20, 1997
- ------------------------
(Date)
<PAGE>
GATEWAY ENERGY CORPORAITON AND SUBSIDAIRES
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- ----------------------------------------
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
1996 1995 1996 1995
--------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 35,536,174 26,061,081 33,651,360 25,915,961
ADD SHARES ISSUABLE PURSUANT TO WARRANT
AGREEMENTS LESS SHARES ASSUMED
REPURCHASED AT THE AVERAGE MARKET
PRICE 118,430(1) 21,598(1) 97,333(1) 21,693(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) 186,476(1) 5,473(1) 188,103(1)
--------------- --------------- ----------------- -----------------
TENTATIVE NUMBER OF SHARES FOR
COMPUTATION OF PRIMARY EARNINGS PER
SHARE 35,654,604 26,409,780 33,754,166 26,266,382
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(1) 0 90(1)
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(1) 0 1,535(1)
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(1) 38,567,623(1) 48,077,126(1) 37,295,782(1)
--------------- --------------- ----------------- -----------------
TENTATIVE NUMBER OF SHARES FOR COMPUTION
OF FULLY DILUTED EARNINGS PER SHARE 84,357,628 64,980,653 81,831,292 63,563,789
--------------- --------------- ----------------- -----------------
--------------- --------------- ----------------- -----------------
LOSS APPLICABLE TO COMMON STOCK ($963,900) ($483,500) ($2,893,200) ($1,426,200)
ADD BACK PROVISION FOR PREFERRED DIVIDENDS
RELATING TO CONVERTIBLE PREFERRED
STOCK 667,100 611,400 2,695,400 1,726,800
--------------- --------------- ----------------- -----------------
NET EARNINGS (LOSS) FOR COMPUTATION OF FULLY
DILUTED EARNINGS PER SHARE ($296,800) $127,900 ($197,800) $300,600
--------------- --------------- ----------------- -----------------
--------------- --------------- ----------------- -----------------
EARNINGS (LOSS) PER COMMON SHARE [cad 228]
PRIMARY AND FULLY DILUTED ($0.03) ($0.02) ($0.09) ($0.06)
--------------- --------------- ----------------- -----------------
--------------- --------------- ----------------- -----------------
</TABLE>
- ------------------------
(1) NOT USED IN PRIMARY OR FULLY DILUTED EARNINGS PER SHARE CALCULATIONS
AS EFFECT WOULD BE ANTIDILUTIVE.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
EXHIBIT 21--SUBSIDIAIRES
<TABLE>
<CAPTION>
COMPANY STATE PERCENT OWNED
- ----------------------------------- ---------- -----------------
<S> <C> <C>
Gateway Pipeline Co. Missouri 90%
Gateway Energy Marketing Texas 100%
Venture Resources, Inc. Texas 100%
Fort Cobb Oklahoma Irrigation
Fuel Authority, L.L.C. Oklahoma 99%
Shoreham Gathering Company Nebraska 80%
Ozark Natural Gas Company Missouri 100%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> NOV-30-1996
<CASH> 1,603,600
<SECURITIES> 0
<RECEIVABLES> 4,480,600
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,886,300
<PP&E> 28,933,000
<DEPRECIATION> 3,714,300
<TOTAL-ASSETS> 33,069,900
<CURRENT-LIABILITIES> 9,118,300
<BONDS> 10,111,500
7,809,500
9,400
<COMMON> 373,600
<OTHER-SE> 4,103,700
<TOTAL-LIABILITY-AND-EQUITY> 33,069,900
<SALES> 17,581,100
<TOTAL-REVENUES> 17,581,100
<CGS> 9,559,400
<TOTAL-COSTS> 16,272,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,107,400
<INCOME-PRETAX> (197,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (197,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (197,800)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
