<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
For the transition period from
__________to __________
Commission File No. 0-06404
GATEWAY ENERGY CORPORATION
- -----------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 44-0651207
---------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
10842 Old Mill Road, Suite #5
Omaha, NE 68154
(Address of principal executive offices)
Issuer's telephone number (402) 330-8268
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes_____X_____ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
As of September 30, 1997 the Issuer had 14,538,300 shares of its common
stock outstanding.
Transitional Small Business Disclosure Format: Yes____ No___X___
<PAGE>
FORM 10-QSB
PART I
ITEM 1. FINANCIAL STATEMENTS
Page
Unaudited Consolidated Balance Sheet
as of August 31, 1997. 9
Unaudited Consolidated Statements of Operations for
the three months and six months ended August 31, 1997,
and August 31, 1996. 10
Unaudited Consolidated Statements of Cash Flows for
the six months ended August 31, 1997, and August 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
August 31, 1997 and 1996:
Increase
1997 1996 (Decrease)
---- ---- -----------
Operating Revenues $3,458,600 $ 4,945,700 $(1,487,100)
Operating Margin 605,600 673,000 (67,400)
Depreciation, Depletion and Amortization 228,100 224,200 3,900
General and Administrative 333,900 545,900 (212,000)
Other Income (Expense) 29,500 (91,100) 120,600
Net Earnings (Loss) 61,300 (194,500) 255,800
Income (Loss) Applicable to Common Stock 61,300 (875,400) 936,700
1
<PAGE>
GENERAL. Natural gas prices for Henry Hub and El Paso Permian Basin index
prices as reported in Inside FERC Gas Market Report for the current quarter are
comparable to the prior year. Henry Hub and El Paso monthly index prices
averaged $1.93 and $2.04 respectively, compared to $2.58 and $2.06,
respectively, in the prior year. Natural gas prices have remained very strong
during the summer of 1997 and continue to increase going into the fall and
winter heating season. This level of natural gas prices is adequate to
encourage production and development.
OPERATING REVENUES. Operating revenues decreased $1,487,100 from the
previous period. The revenue decrease was due primarily to i) the loss of a
major producer on one of the Company's joint venture systems, ii) the
discontinuance of the Company's gas marketing activities and, iii) the sale of
Castex Energy, Inc. in October 1996.
OPERATING MARGINS. Operating margins decreased $67,400 from the prior
period primarily as the result of the operating margin related to the sale of
Castex Energy, Inc. in October 1996. The loss of these margins was offset by
legal expenses recorded in 1996 related to the operation of a joint venture.
There were no other significant changes in the overall volumes and margins on
the Company's pipeline systems.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
decreased $212,000 from the prior period. The decrease reflects management's
decision to close the Houston office of a subsidiary and the sale of Castex
Energy, Inc. These reductions were offset by increases due to the Company's
efforts to evaluate its properties and prepare to manage these properties and
costs associated with the retention of an investment advisor to assist the
Company in identifying potential acquisitions and obtaining the necessary
financing.
OTHER INCOME (EXPENSE). Other income increased $120,600 due to a charge
of $200,000 in 1996 related to the impairment of asset value. In 1997 interest
expense increased due to the interest on subordinated notes issued in the
Recapitalization. Income from equity in partnership also decreased slightly in
1997.
NET EARNINGS (LOSS). Net earnings increased $255,800 from the first
quarter of 1996. The decrease in operating margins was offset by reduced
general and administrative expenses and the nonrecurring charge in 1996 for
impairment of asset value.
INCOME (LOSS) APPLICABLE TO COMMON STOCK. Income applicable to common
stock increased $936,700 from a loss of $875,400 in the first quarter of fiscal
1997. The change is due to an increase in net earnings and the elimination of
the provision for preferred stock dividends. All preferred stocks were
eliminated in connection with the Recapitalization which was effective March 1,
1997. The provision for preferred stock dividends was $680,900 in the second
quarter of fiscal 1997.
2
<PAGE>
SIX MONTHS ENDED AUGUST 31, 1997 COMPARED TO AUGUST 31, 1996.
The following summary sets forth information for the six months ended August 31,
1997 and 1996:
<TABLE>
<CAPTION>
Increase
1997 1996 (Decrease)
------- ------- ----------
<S> <C> <C> <C>
Operating Revenues $6,423,300 $ 10,411,700 $(3,988,400)
Operating Margin 1,138,500 1,720,700 (582,200)
Depreciation, Depletion and Amortization 455,400 443,800 11,600
General and Administrative 623,800 1,032,800 (409,000)
Other Income (Expense) 77,200 (117,800) 195,000
Net Earnings 121,700 99,000 22,700
Income (Loss) Applicable to Common Stock 121,700 (1,929,200) 2,050,900
</TABLE>
OPERATING REVENUES. Operating revenues decreased $3,988,400 or 38%. This
decrease in revenue was primarily attributable to i) the loss of a significant
customer on one of the Company's joint venture systems in July 1996, ii) the
termination of gas marketing activities previously conducted by a subsidiary,
and iii) the sale of Castex Energy, Inc. in October 1996. The reduction in
revenues from the significant customer and elimination of marketing activities
did not significantly affect the operating margins.
OPERATING MARGINS. Operating margins decreased $582,200 or 34% from the
similar period in the prior year. The decrease in operating margin was the
result of the sale of Castex Energy, Inc. in 1996 and generally lower volumes
and higher operating expenses on the Company's operating systems. Operating
expenses in fiscal 1998 include fees paid to others to operate several systems.
DEPRECIATION AND DEPLETION. Depreciation and depletion increased by
$11,600 due to increases in depletion and oil and gas properties, partially
offset by lower depreciation due to properties sold after August 1996.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
decreased $409,000 due primarily to the closing of the Houston office of Gateway
Pipeline Company and the sale of Castex Energy, Inc. in October 1996. The
savings from these actions were partially offset with costs associated with the
review and analysis of the Company's joint venture properties and fees paid to
an investment advisor.
OTHER INCOME (EXPENSE). Other income increased by $195,000 due primarily
to the $200,000 charge for the loss on the Guymon Pipeline System recorded in
the second quarter of fiscal 1997.
NET EARNINGS. Net earnings increased $22,700 over the prior period.
Lower operating margins of $582,200 were offset by decreases in general and
administrative expenses. Also, the period in fiscal 1997 included a charge of
$200,000 related to the charge for impairment of asset value.
INCOME (LOSS) APPLICABLE TO COMMON STOCK. Income applicable to common
stock increased $2,050,900 from a loss of $1,929,200 in the first six months of
fiscal 1997. The change is due to an increase in net earnings and the
elimination of the provision for preferred stock dividends. All
3
<PAGE>
preferred stocks were eliminated in connection with the Recapitalization
which was effective March 1, 1997. The provision in the first half of fiscal
1997 was $2,028,200, including $693,000 for the redemption of Series C
preferred stock.
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
August 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 $400,000. As of September 30, 1997 the amount
available under this operating line was $395,000.
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 sold its interest in Castex LP and its other oil and gas properties
for $3.5 million in September 1997. As discussed in Note 7, the Company also
reached agreement with one of its joint venture partners to terminate all
existing relationships. As part of the settlement, the Company sold certain
joint venture properties in exchange for $2.7 million and the minority interest
in other joint ventures. The Company received $.5 million in cash with the
remainder due in twenty four equal monthly payments. The proceeds from these
transactions 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 $355,500 in the first
six months of fiscal 1998. This cash generated was used to fund capital
expenditures of $151,700 and to reduce the amount outstanding under the
operating line of credit. The Company believes that cash generated from
operations and cash received on the obligation from the sale of joint venture
properties will be sufficient to meet its debt service requirements and capital
expenditures.
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 part of its strategy, the Company recently completed the sale of its
investment in Castex Energy 1995 LP and the sale or exchange of several joint
venture properties with a prior joint venture
4
<PAGE>
partner. As a result of these transactions, the Company has cash balances
available for acquisition or capital expenditures of approximately $3.25
million. The Company expects that total revenues and net operating profit
will be significantly less in the third and fourth quarters than in the first
and second quarters of fiscal 1998. Revenues and net operating profit
attributable to the joint ventures sold were $1,800,000 and $340,000,
respectively, in the first six months of fiscal 1998. The Company also
expects that net earnings will be further reduced from the elimination of
earnings from investment in the Castex LP limited partnership. The decrease
in net earnings will be partially offset by gains resulting from these
transactions.
Net earnings may be further adversely affected by an increase in general
and administrative expenses resulting from the efforts to analyze properties,
increase throughput, and identify, analyze and negotiate the acquisition of
additional pipeline properties. The Company has recently employed a chief
operating officer and others with industry experience to manage all Company
properties and to evaluate the systems now completely owned. The Company
believes that these properties are in sound physical condition and that there
are adequate natural gas reserves behind the natural gas pipelines to generate
future cash flow sufficient to recover the cost of the pipelines. The Company
also believes that the systems have been "under managed" and expects to be able
to increase the throughput volumes on these systems. However, there is no
assurance that the previous operator has properly maintained the systems or that
the Company will be able to connect future volumes of natural gas. The future
success of the Company depends to a large extent on management's ability to
improve the financial performance of several systems previously managed and
operated by a former joint venture partner.
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.
5
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Information Provided on Form 8-K dated September 8, 1997.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) Annual Meeting held September 4, 1997.
b) The following directors were elected at the meeting and comprise all
of the directors of the Company:
L. J. Horbach N. J. Pilger
D. L. Anderson M. T. Fadden
C. A. Holtgraves A. Yeddis
J. B. Ewing
c) The following table sets forth the matters voted upon at the meeting.
Votes Votes
For Against Abstentions
---------- -------- ------------
i) Ratify appointment of
Grant Thornton LLP as
independent certified public
accountants. 7,972,300 164,500 68,600
6
<PAGE>
ii) Elect the following
nominated directors. Votes For Votes Withheld
--------- --------------
L. J. Horbach 8,004,600 200,800
D. L. Anderson 8,099,200 106,200
C. A. Holtgraves 8,088,900 115,500
J. B. Ewing 8,088,900 115,500
N. J. Pilger 8,089,100 116,300
M. T. Fadden 8,100,000 105,400
A. Yeddis 8,100,000 105,400
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
11 Statement re Computation of Per Share
Earnings, filed herewith.
21 Subsidiaries, filed herewith.
27 Financial Data Schedule, filed herewith.
b) Report on Form 8-K:
September 8, 1997 - Disposition of limited partnership interest
in Castex Energy 1995 LP and settlement with
Shoreham Pipeline Company and related sale
and exchange of joint venture interests.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GATEWAY ENERGY CORPORATION
______/s/ Neil A. Fortkamp_______
Chief Financial Officer
____ October 14, 1997____
(Date)
8
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 1997
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 195,800
Trade accounts receivable, net 2,587,400
Inventories 83,400
Prepaid expenses and other assets 698,000
------------
Total current assets 3,564,600
Property and Equipment - At Cost
Gas gathering, processing and transportation 12,002,900
Office furniture and other equipment 320,000
------------
12,322,900
Less accumulated depreciation, depletion
and amortization (2,248,300)
------------
10,074,600
Other Assets
Assets held for sale 3,205,900
Equity investment in partnership 383,400
Other 190,600
------------
3,779,900
------------
$17,419,100
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 199,000
Current maturities of long-term debt 523,900
Accounts payable 2,061,300
Accrued expenses and other liabilities 631,400
------------
Total current liabilities 3,415,600
Long-term debt, less current maturities 1,743,200
Minority interests 173,400
Stockholders' Equity
Common stock- authorized, 17,500,000 shares of $.25
par value; issued and outstanding 14,337,400 shares 3,584,300
Additional paid-in capital 15,399,300
Accumulated deficit (6,896,700)
------------
12,086,900
------------
$17,419,100
===========
The accompanying notes are an integral part of this statement.
9
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31 August 31
------------------------ ---------------------------
1997 1996 1997 1996
----- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues
Natural gas and oil sales $ 3,150,900 $4,157,400 $ 5,776,600 $ 8,771,300
Transportation and processing 168,600 223,700 351,200 466,400
Other 139,100 564,600 295,500 1,174,000
----------- ---------- ----------- -----------
3,458,600 4,945,700 6,423,300 10,411,700
Operating costs and expenses
Cost of natural gas purchased 2,163,900 3,515,500 3,972,000 7,251,600
Operation and maintenance 689,100 757,200 1,312,800 1,439,400
General and administrative 333,900 545,900 623,800 1,032,800
Depreciation and depletion 228,100 224,200 455,400 443,800
----------- ---------- ----------- -----------
3,415,000 5,042,800 6,364,000 10,167,600
----------- ---------- ----------- -----------
Operating profit (loss) 43,600 (97,100) 59,300 244,100
Other income (expense)
Equity in earnings of partnerships 112,800 159,100 234,000 253,500
Interest income 2,400 14,500 9,100 26,500
Interest expense (95,400) (74,100) (178,200) (198,200)
Other 9,700 (190,600) 12,300 (199,600)
----------- ---------- ----------- -----------
29,500 (91,100) 77,200 (117,800)
Earnings (loss) before income taxes 73,100 (188,200) 136,500 126,300
Income taxes 11,800 6,300 14,800 27,300
----------- ---------- ----------- -----------
Net earnings (loss) 61,300 (194,500) 121,700 99,000
Provision for preferred dividends - (680,900) - (2,028,200)
----------- ---------- ----------- -----------
Income (loss) applicable to
common stock $ 61,300 $ (875,400) $ 121,700 $ (1,929,200)
========== ========== ========== ============
Income (loss) per common share $ 0.004 $ (0.72) $ 0.009 $ (1.68)
========== ========== ========== ============
Number of shares used in
computing the income (loss)
per common share 14,337,400 1,209,300 14,198,400 1,149,800
========== ========== ========== ============
</TABLE>
10
The accompanying notes are an integral part of this statement.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended August 31
1997 1996
----------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
Cash flows from operating activities-
Net earnings $ 121,700 $ 99,000
Adjustments to reconcile net earnings to net
cash provided by operating activities
Equity in earnings of partnerships (234,000) (253,500)
Distributions from partnerships 67,000 96,200
Depreciation, depletion and amortization 455,400 443,800
Loss from impairment of value - 200,000
Compensation accrued under stock award plans - (4,100)
Stock issued for interest, fees and services - 84,600
Non-cash interest and other expense 52,700 -
Minority interest (11,100) (400)
Increase (decrease) in cash and cash
equivalents, net of businesses acquired,
resulting from changes in:
Trade accounts receivable 182,400 (760,700)
Inventories (28,300) 70,800
Prepaid expenses and other current assets (279,800) (440,000)
Accounts payable (295,600) 911,000
Accrued expenses and other liabilities 325,100 (70,900)
--------- ---------
Net cash provided by operating activities 355,500 375,800
--------- ---------
Cash Flows from investing activities -
Capital expenditures (151,700) (255,400)
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)
Other (43,000) (153,600)
--------- ---------
Net cash used in investing activities $(194,700) $(2,844,200)
--------- ---------
11
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended August 31
1997 1996
---------- ----------
Cash flows from financing activities -
Decrease in restricted and escrowed cash $ - $ 708,600
Proceeds from borrowings 989,000 1,867,700
Payments on borrowings (1,266,800) (1,709,900)
Proceeds from sale of preferred stock - 1,445,400
Retirement of preferred stock - (96,000)
Preferred dividends paid - (1,111,700)
Other (16,700) -
--------- -----------
Net cash provided by (used in) financing
activities (294,500) 1,104,100
--------- -----------
Net change in cash and cash equivalents (133,700) (1,364,300)
Cash and cash equivalents at beginning of period 329,500 1,572,500
--------- -----------
Cash and cash equivalents at end of period $ 195,800 $ 208,200
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest $125,400 $68,500
Income Taxes 94,500 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 9,400 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 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 reports such interest, beginning March 1, 1996, using the
equity method of accounting. Certain reclassifications have been made to the
financial statements filed as of August 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 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").
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:
o 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.
o The Company offered to exchange $9,961,500 stated value of Series A, B,
J, K, L, M, & 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.
o 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, $283,400 of restructuring costs
reduced paid-in capital.
14
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(3) Notes Payable
Notes payable consist of the following at August 31, 1997.
Operating line of credit $159,000
Operating line of credit - Ft. Cobb 40,000
--------
$199,000
========
The Company has used operating cash flow to reduce the operating line of
credit from $316,000 at February 28, 1997 to $159,000 at August 31, 1997.
(4) Long-term Debt
Long-term debt at August 31, 1997, consists of the following:
Promissory notes $ 972,000
Subordinated notes 991,800
Note payable to PCI 303,300
----------
2,267,100
Less current maturities 523,900
----------
$1,743,200
==========
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 aggregate
subordinated notes have a 4.36% interest in the cash distributions of Castex LP
after recovery of the Company's investment and the payment of related income
taxes. This interest is expected to increase the effective interest rate on the
subordinated notes by approximately 0.5%.
(5) Assets Held for Sale
On September 2, 1997, the Company sold its oil and gas producing interests,
including its equity investment in Castex LP for $3,500,000. The carrying value
of the assets held for sale as of August 31, 1997 is as follows:
Equity investment in Castex LP $2,202,700
Other oil and gas producing interests, net 1,003,200
----------
$3,205,900
==========
15
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The Company expects to realize a net gain on the sale of these assets of
approximately $250,000 after deduction of closing costs and an amount due to
holders of subordinated notes as discussed in Note 4.
(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
ending August 31, 1996 have been adjusted to reflect this reverse split.
(7) Subsequent Event
On September 8, 1997 the Company entered into a Settlement Agreement (the
"Agreement") with Shoreham Pipeline Company ("Shoreham") to dissolve all of the
joint venture agreements between the Company and Shoreham and to settle
litigation between the parties.
Under the Agreement, the Company transferred its interest in six operating
properties to Shoreham for $2.7 million of which $.5 million was paid in cash at
closing. The remainder will be paid in twenty-four monthly installments
beginning December 1, 1997 with interest at 9% per annum. In addition, Shoreham
transferred its interest in nine other operating properties to the Company. The
Company also acquired Shoreham's 20% minority interest in a subsidiary which
owns several offshore pipeline systems in exchange for one of these systems.
During the first six months of fiscal 1998, the joint ventures sold, net of
interests in properties acquired, contributed $3,222,000 of total revenues and
$778,600 of net operating profit.
The Company expects that the gain or loss on these transactions, after
deducting costs applicable to the transaction, will not be significant.
16
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
EXHIBIT 11
Three Months Ended Six Months Ended
---------------------- --------------------
August 31, August 31, August 31, August 31,
1997 1996 (2) 1997 1996 (2)
------ ------- ---------- -----------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 14,337,400 1,209,300 14,198,400 1,149,800
Add net shares issuable pursuant to warrant
agreements less shares assumed repurchased
at the average market price 0 3,900 0 4,000
Add net shares pursuant to stock options less
shares assumed repurchased at the average
market price 0 0 0 300
Tentative number of shares for computation of ------------ ---------- ------------- ---------
primary earnings per share 14,337,400 1,213,200 14,198,400 1,154,100
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 0 0
Add additional dilutive shares issuable assuming
conversion of Series B,G,J,K,L,M,N & A
preferred stock into common stock (1) 1,948,100 (1) 1,807,800
Tentative number of shares for computation
of fully diluted earnings per share ------------ ---------- ------------- ---------
14,337,400 3,161,300 14,198,400 2,961,900
========== ========= ========== =========
Earnings (loss) applicable to common stock $ 61,300 $(875,400) $121,700 $(1,929,200)
Add provision for preferred dividends
relating to convertible preferred stock 0 680,900 0 1,335,200
Net earnings (loss) for computation of fully
diluted earnings per share ------------ ---------- ------------- ----------
$ 61,300 $(194,500) $121,700 $(594,000)
========== ========= ========== =========
Income (loss) per common share - primary,
excluding common stock equivalents $ 0.004 $ (0.72) $ 0.009 $ (1.68)
========== ========= ========== =========
</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>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
EXHIBIT 21-SUBSIDIAIRES
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%
Gateway Offshore Pipeline Company Nebraska 100%
Ozark Natural Gas Company Missouri 100%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> AUG-31-1997
<CASH> 195,800
<SECURITIES> 0
<RECEIVABLES> 2,587,400
<ALLOWANCES> 0
<INVENTORY> 83,400
<CURRENT-ASSETS> 3,564,600
<PP&E> 12,322,900
<DEPRECIATION> 2,248,300
<TOTAL-ASSETS> 17,419,100
<CURRENT-LIABILITIES> 3,415,600
<BONDS> 1,743,200
0
0
<COMMON> 3,584,300
<OTHER-SE> 8,502,600
<TOTAL-LIABILITY-AND-EQUITY> 17,419,100
<SALES> 6,423,300
<TOTAL-REVENUES> 6,423,300
<CGS> 3,972,000
<TOTAL-COSTS> 5,284,800
<OTHER-EXPENSES> 1,079,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178,200
<INCOME-PRETAX> 136,500
<INCOME-TAX> 14,800
<INCOME-CONTINUING> 121,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,700
<EPS-PRIMARY> .009
<EPS-DILUTED> .009
</TABLE>
