<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, 1998
[ ] 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)
500 Dallas Street, Suite 2615
Houston, TX 77002
(Address of principal executive offices)
Issuer's telephone number : (713) 336-0844
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 January 12, 1999, the Issuer had 15,242,532 shares of its common
stock outstanding.
Transitional Small Business Disclosure Format: Yes _____ No __X__
<PAGE>
FORM 10-QSB
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Unaudited Consolidated Balance Sheet
as of November 30, 1998. 10
Unaudited Consolidated Statements of Operations for
the three months and nine months ended November 30, 1998,
and November 30, 1997. 11
Unaudited Consolidated Statements of Cash Flows for
the nine months ended November 30, 1998,
and November 30, 1997. 12
Notes to Consolidated Financial Statements 13
</TABLE>
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
Comparisons between fiscal 1999 and fiscal 1998 are significantly
affected by two major transactions. First, in September 1997, the Company
reached agreement with Shoreham Pipeline Company ("Shoreham") to dissolve all
of the joint ventures between the parties. The Company transferred its
interests, ranging from 60% to 80%, in six joint ventures to Shoreham. The
Company acquired Shoreham's interests, ranging from 5% to 20%, in nine joint
ventures. The Company also acquired Shoreham's 20% minority interest in
Gateway Offshore Pipeline Company and transferred an offshore system to
Shoreham.
Second, in September 1997, the Company sold its limited partnership
interest in Castex LP and other oil and gas producing properties. The
proceeds received from the above transactions have been used to retire lines
of credit, fund capital expenditures and invest in a certificate of deposit.
2
<PAGE>
The Henry Hub Index price for gas delivered in southern Louisiana
averaged $1.94 in the third quarter of fiscal 1999, compared with $2.11 in
the prior quarter and $2.81 in the same quarter of the prior year. Natural
gas prices have remained firm in spite of the downward pressure on oil
prices. Natural gas producers continue to exploit new drilling opportunities.
THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO NOVEMBER 30, 1997
The following table sets forth information for the three months ended
November 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating revenues $1,983,845 $2,480,377
Operating margins 441,344 198,077
Depreciation and amortization 185,693 124,300
General and administrative 1,135,401 449,400
Other income (expense) (63,197) 441,923
Net income (loss) (950,572) 62,700
</TABLE>
Operating revenues declined $496,532 in the third quarter of fiscal 1999
from the same quarter of the prior year. The impact of the decline in sales
prices was partially offset by the startup of Gateway Energy Marketing,
increased revenues from the Company's offshore operations, and by
enhancements made during the current period to certain pipeline system
facilities and marketing arrangements.
Operating margins, that is revenues less the cost of gas and operating
expenses, increased $243,267 in fiscal 1999 over the same quarter of the
prior year. In fiscal 1999, the Company continues to focus on enhancing the
profitability of its existing systems by reviewing and renegotiating
marketing contracts, when appropriate, and controlling operating and
maintenance costs through internal, rather than third-party, management.
General and administrative expenses increased $686,001 in the third
quarter of fiscal 1999 compared to the same quarter of the prior year. As
more fully described in Note 5 to the accompanying financial statements, the
Company and Shoreham resolved certain legal disputes through mediation in
November 1998. The resolution of these disputes resulted in $466,470 of
charges for the write-off of amounts receivable from Shoreham, plus $76,538
in related legal fees.
As a result of the dissolution of the joint ventures with Shoreham in
September 1997, the Company also hired management and support staff who
manage its operations from the office in Houston. This change in strategy
added significant general and administrative costs, reflecting costs of
additional personnel, office rent and telecommunications, legal fees and
other office costs. However, the Company expects to continue to improve the
profitability of its current properties and is actively seeking to acquire or
invest in new properties.
During the third quarter of fiscal 1999 the Company moved its corporate
headquarters to Houston, Texas, and maintained both the Houston and Omaha
offices and staff for the entire third quarter in order to provide a smooth
transition. Accordingly, the current quarter general and administrative
expense includes approximately $72,653 in nonrecurring costs. Going
3
<PAGE>
forward, general and administrative expenses are expected to be approximately
the same as before the move, excluding the costs of the Shoreham mediation
settlement and other nonrecurring costs.
Other income (expense) for the third quarter decreased $505,120 from the
same period of the prior year. The fiscal 1998 total includes gain on the
sale of certain partnership and joint venture properties of $308,700, plus
equity in Castex LP earnings of $127,223. Interest income also declined
between the two periods, reflecting the lower current period certificate of
deposit balance, and a $34,451 write-off of interest income previously
recognized on the Shoreham note receivable.
The increase in net loss for the quarter of $1,013,272 mainly reflects:
(i) the effects of the fiscal 1999 mediation settlement with Shoreham and
related legal and other costs; (ii) the fiscal 1998 sale of certain joint
venture and partnership interests, and; (iii) higher general and
administrative expenses, and; (iv) substantial costs incurred to rehabilitate
several systems. The impact of the items listed above was partially offset by
enhancements to pipeline systems and renegotiated marketing arrangements.
NINE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO NOVEMBER 30, 1997
The following table sets forth information for the nine months ended
November 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Restated)
<S> <C> <C>
Operating revenues $6,063,652 $8,957,740
Operating margins 1,322,652 1,387,840
Depreciation and amortization 548,812 579,600
General and administrative 2,380,031 1,070,600
Other income (expense) (110,731) 158,360
Net loss (1,729,819) (122,400)
</TABLE>
Operating revenues declined $2,894,088 in the nine months ended November
30, 1998 from the same period of the prior year. Sales attributable to the
Company's interests in properties conveyed to Shoreham accounted for
$3,369,076 of the revenues in the fiscal 1998 period, and oil and gas
production revenues were $102,742. These decreases were partially offset by
the startup of Gateway Energy Marketing, by higher volumes at Fort Cobb and
increased revenues from offshore operations.
Operating margins, that is revenues less cost of gas and operating
expenses, decreased $65,188 in the first nine months of fiscal 1999 compared
to the same period of the prior year. Operating margins from the joint
ventures conveyed to Shoreham and the oil and gas properties totaled $876,989
in the fiscal 1998 period. That shortfall was partially made up by increased
volumes at Fort Cobb, increased offshore activity and the startup of Gateway
Energy Marketing. In fiscal 1999 the Company has primarily focused on
enhancing the profitability of its existing systems.
4
<PAGE>
General and administrative expenses increased $1,309,431 in the nine
months ended November 30, 1998 compared to the same period of the prior year,
and include $466,470 of charges for the write-off of amounts receivable from
Shoreham, plus $80,140 in related legal fees from the Shoreham mediation
settlement in November 1998.
As a result of the dissolution of the joint ventures with Shoreham in
September 1997, the Company also hired management and support staff who
manage its operations from the office in Houston. This change in strategy
added significant general and administrative costs, reflecting costs of
additional personnel, office rent and telecommunications, legal fees and
other office costs. However, the Company expects to continue to improve the
profitability of its current properties and is actively seeking to acquire or
invest in new properties.
During the nine months ended November 30, 1998, the Company moved its
corporate headquarters to Houston, Texas, and maintained both the Houston and
Omaha offices and staff for the entire third quarter in order to provide a
smooth transition. Accordingly, general and administrative expense for the
nine-month period includes $197,653 in nonrecurring costs, exclusive of the
Shoreham costs, which includes the costs of maintaining both offices,
employee severance and other moving costs. Going forward, general and
administrative expenses are expected to be approximately the same as before
the move, excluding the costs of the Shoreham mediation settlement and other
nonrecurring costs.
Other income (expense) for the nine months ended November 30, 1998
decreased $269,091 from the same period of the prior year. The fiscal 1998
total includes gain on the sale of certain partnership and joint venture
properties of $308,700, plus equity in Castex LP earnings of $307,260. Other
income (expense) for the current period includes $34,451 for the write-off of
interest income previously recognized on the Shoreham note receivable, and
the fiscal 1998 total includes a $306,800 charge related to changes in
certain of the Company's convertible promissory notes, which is discussed
more fully in Note 7.
The increase in the net loss for the nine months ended November 30, 1998
of $1,607,418 mainly reflects: (i) the fiscal 1998 sale of certain joint
venture and partnership interests; (ii) the effects of the fiscal 1999
mediation settlement with Shoreham and related legal and other costs, and;
(iii) higher general and administrative expenses required to effectively
manage and enhance the Company's properties and seek out additional
investment opportunities. The impact of the items listed above was partially
offset by enhancements to pipeline systems, renegotiated marketing
arrangements, increased volumes at Fort Cobb, by increased offshore activity
and the startup of Gateway Energy Marketing.
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
were eliminated and total debt service reduced to $22,000 per month. The
Company's long-term debt to total capitalization is approximately 10% at
November 30, 1998 which should provide opportunity for the Company to utilize
conventional long-term financing to fund acquisitions or construction
opportunities.
5
<PAGE>
The Company experienced a deficit in cash flow from operating activities
of $850,363 during the first nine months of fiscal 1999, but has cash and
cash equivalents plus a certificate of deposit totaling $1,864,236 as of
November 30, 1998. Additionally, the Company has in place an operating line
of credit with a bank for maximum borrowings of up to $500,000. As of
November 30, 1998 the amount available under this operating line was
$103,455. The outstanding balance was repaid during the first week of
December with proceeds from the mediation settlement.
Absent acquisitions, the Company will continue to fund its operations
through internally generated funds and available cash and the certificate of
deposit. The company believes its cash flows from operations and available
cash and the certificate of deposit will be sufficient to fund its ongoing
operations for the foreseeable future. Any significant property acquisitions
will require outside project financing.
FACTORS AFFECTING FUTURE RESULTS
One of the principal objectives of the Recapitalization was to
facilitate access to reasonably priced capital to enable the Company to
enhance stockholder value through the execution of certain strategies. These
strategies include, among other things: (i) focusing on gathering,
processing, transporting and marketing of natural gas; (ii) expanding the
Company's asset base in core geographic areas; (iii) developing a niche that
will create demand for our services, and; (iv) acquiring or constructing
properties in one or more new core areas.
The Company must provide services to its customers, primarily producers,
at a competitive price. Therefore, in order to be successful the Company must
contain its costs in line with industry competitors. The Company's access to
reasonably priced long-term capital will have a significant effect on its
ability to acquire additional properties to increase operating margins
sufficiently to cover its fixed overhead costs. The Company believes that the
Recapitalization, cash reserves and experienced operating management will
allow the Company to access capital and find properties which can provide
attractive returns. However, there can be no assurance that the Company will
be successful in this endeavor.
The Company's ability to generate long-term value for the common
stockholder is dependent upon the enhancement of its core assets and the
successful acquisition of additional midstream assets. There are many
companies participating in the midstream segment of the natural gas industry,
many with resources greater than the Company. Greater competition for
profitable operations can increase prices and make it more difficult to
acquire assets at reasonable multiples of cash flow.
The Company believes that it will be able to compete in this environment
and will be able to find attractive investments which compliment its existing
properties; however, it is not possible to predict competition or the effect
this will have on the Company's operations.
The Company's operations are also significantly affected by factors
which are outside the control of the Company. Gas gathering and processing is
dependent on throughput volume. Throughput on the Company's systems is
dependent on natural gas production which is significantly affected by
natural gas prices as prices affect the willingness of producers to invest
the required capital to obtain geological and geophysical information, drill
development or
6
<PAGE>
exploratory wells, and to rework or maximize production on existing wells.
Natural gas prices have recently stabilized at levels which should provide
adequate incentive to producers; however, there is no assurance that such
prices will remain at current levels, and that producers will continue to
react positively to the current prices.
The Company's revenues, particularly in its retail operations, are also
affected by weather. Much of the retail demand is for crop irrigation and
drying. Heavy precipitation in the growing season and hot, dry weather in the
fall can significantly reduce demand for natural gas.
YEAR 2000 ISSUES
The Year 2000 issue refers to the inability of computers, software or
embedded microchips to reliably recognize, process and retain dates
subsequent to December 31, 1999. The Company is assessing its risks of
business disruption from the Year 2000 issue and has determined the following:
- The Company's systems are not now fully compliant, but are currently
being updated and will be made fully compliant before March 31, 1999.
- The costs to address remaining Year 2000 issues are nominal.
- The assessment of the risk to the Company due to the lack of
preparedness of its business partners is being performed through the
use of Year 2000 preparedness surveys. This evaluation is still in
progress.
The Company does not believe that its state of preparedness, or that of its
business partners, will have a material effect on its operations.
7
<PAGE>
Part II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
11 Statement re Computation of Per Share Earnings. *
21 Subsidiaries*
27 Financial Data Schedule.*
b) Reports on Form 8-K:
November 24, 1998 - Mediation Settlement with Shoreham
Pipeline Company
- --------------------------------------
* Included in SEC 10-QSB filing only
8
<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/ Scott D. Heflin
-------------------------------------
Chief Financial Officer and Treasurer
January 14, 1999
- ---------------------------
(Date)
9
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1998
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 848,335
Certificate of deposit 1,015,901
Trade accounts receivable 1,175,231
Note receivable, current portion 91,667
Inventories 84,218
Prepaid expenses and other assets 322,194
-----------
Total current assets 3,537,546
-----------
PROPERTY AND EQUIPMENT, AT COST
Gas gathering, processing and transportation 10,364,013
Equipment and office furniture 670,100
-----------
11,034,113
Less accumulated depreciation and amortization (2,442,491)
-----------
8,591,622
-----------
OTHER ASSETS
Note receivable, less current portion 308,333
Other 382,431
-----------
690,764
-----------
$12,819,932
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 396,545
Current maturities of long-term debt 129,184
Accounts payable 1,029,561
Accrued expenses and other liabilities 341,762
-----------
Total current liabilities 1,897,052
-----------
Long-term Debt, less current maturities 1,075,085
-----------
STOCKHOLDERS' EQUITY
Common stock - $0.25 par value; 17,500,000 shares
authorized; 15,242,532 shares issued and outstanding 3,810,633
Additional paid-in capital 15,969,925
Accumulated deficit (9,932,763)
-----------
9,847,795
-----------
$12,819,932
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
10
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES: (Restated)
Natural gas sales $1,589,893 $2,306,800 $ 5,087,566 $8,083,400
Transportation and processing 307,160 147,200 835,928 498,500
Other 86,792 26,377 140,158 375,840
---------- ---------- ----------- ----------
1,983,845 2,480,377 6,063,652 8,957,740
---------- ---------- ----------- ----------
OPERATING COSTS AND EXPENSES:
Cost of natural gas purchased 1,159,828 1,811,700 3,767,489 5,783,700
Operation and maintenance 382,673 470,600 973,511 1,786,200
Depreciation and amortization 185,693 124,300 548,812 579,600
General and administrative 1,135,401 449,400 2,380,031 1,070,600
---------- ---------- ----------- ----------
2,863,595 2,856,000 7,669,843 9,220,100
---------- ---------- ----------- ----------
OPERATING LOSS (879,750) (375,623) (1,606,191) (262,360)
OTHER INCOME (EXPENSE)
Equity in earnings of partnership - 127,223 - 307,260
Interest and other income 16,793 96,600 125,037 105,700
Interest expense (92,382) (87,700) (256,157) (572,700)
Other 12,392 (2,900) 20,389 9,400
Gain (loss) on disposal of assets - 308,700 - 308,700
---------- ---------- ----------- ----------
(63,197) 441,923 (110,731) 158,360
---------- ---------- ----------- ----------
EARNINGS (LOSS) BEFORE INCOME
TAXES (942,947) 66,300 (1,716,922) (104,000)
Income taxes 7,625 3,600 12,897 18,400
---------- ---------- ----------- ----------
NET EARNINGS (loss) $ (950,572) $ 62,700 $(1,729,819) $ (122,400)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ (0.06) $ 0.01 $ (0.12) $ (0.01)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30,
------------------------------
1998 1997
---- ----
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,729,819) $ (122,400)
Adjustments to reconcile net loss
to net cash provided by operating activities-
Equity in undistributed earnings of partnership - (383,900)
Distributions from partnerships - 83,700
Depreciation, depletion and amortization 548,812 579,600
(Gain) on disposal of assets - (308,700)
Non-cash expenses 601,721 370,200
Other (8,005) 400
Increase (decrease) in cash and cash
equivalents resulting from changes in-
Trade accounts receivable (295,731) 1,032,300
Inventories 37,481 (34,100)
Prepaid expenses and other current assets (75,146) (185,500)
Accounts payable (27,738) (836,600)
Accrued expenses and other liabilities 98,062 98,200
----------- ----------
Net cash provided by (used in) operating activities (850,363) 293,200
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (695,871) (305,200)
Net proceeds from sale of properties 5,400 3,618,300
Acquisition of business (44,000) -
Collection of notes receivable 1,373,030 -
Net decrease in certificate of deposit 1,734,099 -
Other - (65,000)
----------- ----------
Net cash provided by investing activities 2,372,658 3,248,100
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 1,250,810 1,524,000
Payments on borrowings (2,417,070) (1,908,200)
Issuance of common stock 52,500 -
Other - (16,700)
----------- ----------
Net cash (used in) financing activities (1,113,760) (400,900)
----------- ----------
Net change in cash and cash equivalents 408,535 3,140,400
Cash and cash equivalents at beginning of period 439,800 329,500
----------- ----------
Cash and cash equivalents at end of period $ 848,335 $3,469,900
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
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 financial statements should be read in
conjunction with the financial statements and the Notes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended February 28,
1998. Certain minor reclassifications to the November 30, 1997 statements
have been made to conform with the November 30, 1998 presentation. The
Company also restated the Statement of Operations and Statement of Cash Flows
for the nine-month period ended November 30, 1997 (see also Note 7).
The consolidated financial statements include the accounts of Gateway
Energy Corporation ("GEC"), and all of its wholly 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.
The Company purchases, develops, owns, and operates natural gas
gathering and pipeline systems and processing plants and related facilities
in the Gulf Coast and Southwestern states of Texas, Oklahoma and Louisiana,
and in offshore Texas state waters. The Company also operates a natural gas
distribution company in Oklahoma.
(2) Earnings Per Common Share
In 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, EARNINGS PER SHARE. Basic earnings per share is computed by
dividing the net earnings or loss by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
by dividing net earnings or loss by the weighted average number of common
shares outstanding after giving effect to all potentially dilutive common
shares that were outstanding during the period. Potential dilutive common
shares are not included in the computation of diluted earnings per share if
they are anti-dilutive. For the three-month and nine-month periods ended
November 30, 1998 and 1997, the diluted loss per common share is the same as
basic since the effect of potentially dilutive common shares arising from
convertible debt and outstanding stock options and warrants was anti-dilutive.
The weighted average number of common shares outstanding used in the
computation of basic and diluted earnings per share for the three-month
periods ended November 30, 1998 and 1997 and the nine-month periods ended
November 30, 1998 and 1997 were 15,020,114, 14,396,700, 14,710,396 and
14,212,300, respectively.
13
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(3) Notes Payable
Notes payable at November 30, 1998 consisted of the balance outstanding
under the Company's operating line of credit of $396,545. The line of credit
provides for maximum available borrowings of $500,000 through February 27,
1999. Interest is payable monthly at 6.4% per annum and principal is due on
demand, or if no demand is made, at maturity. The line is collateralized by
the Company's certificate of deposit.
(4) Long-term Debt
Long-term debt at November 30, 1998 consists of the following:
<TABLE>
<S> <C>
Subordinated notes $1,026,366
Note payable to PCI 177,903
----------
1,204,269
Less current maturities 129,184
----------
$1,075,085
----------
----------
</TABLE>
(5) Convertible Promissory Notes Exchange
The original conversion privileges of substantially all of the
convertible promissory notes allowed noteholders to convert into common stock
of the Company at a pre-reverse stock split price of $0.40 per share. The
promissory notes inadvertently did not contain the customary anti-dilution
language to effect a change in the conversion price in the case of stock
splits, stock dividends or other capitalization changes. In 1997, certain
noteholders tendered their promissory notes for conversion at $0.40 per
share. In lieu of conversion, the Company and the noteholders agreed to:
(i) a one year extension on the notes, and; (ii) a thirty-day window for
conversion in the event the Company called the promissory notes as
consideration for the noteholders not converting their notes at that time.
The Company and the Noteholders disagreed as to the proper conversion
price per share after giving effect to the one for twenty-five reverse split.
In October 1998, the Company and the noteholders reached an agreement
whereby the Company exchanged outstanding convertible promissory notes, with
principal and accrued interest through October 15, 1998 totaling $600,474,
for cash of $537,974 and 460,000 shares of common stock. In addition,
certain noteholders agreed to cancel a Subscription Agreement with attached
Stock Purchase Rights and to reduce warrants issued to the noteholders from
200,000 to 40,000. The value of the cash and common stock was equal to the
fair market value of the convertible promissory notes at the date of
exchange; therefore no charges are included in the statement of operations
for this exchange.
14
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(6) Note Receivable
In September 1997, the Company entered into a Settlement Agreement with
Shoreham Pipeline Company ("Shoreham") to dissolve all of the joint ventures
between the Company and Shoreham and to settle litigation between the
parties. The Settlement Agreement provided that the Company would receive
$540,000 in cash, a note receivable of $2,160,000 and Shoreham's minority
interest in certain joint ventures in exchange for the Company's interest in
other joint ventures. The note receivable was without collateral and was due
in twenty-four monthly installments beginning December 1, 1997. Shoreham was
to complete the final accounting for all the joint ventures for June, July
and August 1997 and make cash distributions as appropriate.
The Company performed an audit of the final cash distributions from
Shoreham in April 1998 and believed that cash distributions to the Company
for June, July and August 1997 were substantially understated. The Company
initiated legal proceedings to collect the remaining distributions to which
it was entitled. Shoreham counterclaimed for monetary damages for certain
matters also associated with the Settlement Agreement. Beginning July 1,
1998, Shoreham defaulted on the scheduled payments required under the
Settlement Agreement.
During October and November 1998 the companies entered into mediation to
settle their disputes and avoid costly litigation. On November 24, 1998, the
Company and Shoreham reached an agreement under which the Company received:
(i) cash of $725,000; (ii) a note from Shoreham for $400,000, collateralized
with certain properties currently owned by Shoreham, and; (iii) the release
of a net profits interest in the Company's Shipwreck system. The Company
received the first installment on this note receivable during January 1999.
General and administrative expenses for the three-month and the
nine-month periods ended November 30, 1998 include $466,470 of charges for
the write-off of amounts receivable from Shoreham, plus related legal fees
for the three-month and nine-month periods of $76,538 and $80,140,
respectively. Interest expense for both periods includes $34,451 for the
write-off of interest income previously recognized on the Shoreham note
receivable.
(7) Restatement of November 30, 1997 Financial Statements
The financial statements as of November 30, 1997, and for the nine-month
period then ended have been restated to reflect an adjustment for the cost of
amending certain convertible promissory notes effective August 22, 1997. The
adjustment increased interest expense by $306,800 and reduced earnings per
share by $0.02 for the nine-month period ended November 30, 1997.
As more fully described in Note 5, certain convertible promissory notes
did not contain the customary anti-dilution language. In the fourth quarter
of fiscal 1998, pursuant to the agreement reached in August 1997, the Company
recognized a charge to interest expense that reflected the difference between
the $0.40 per share conversion price and the market value of the Company's
common stock in August 1997.
15
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(8) Acquisitions
Effective July 1, 1998, the Company acquired all of the outstanding
stock of Abtech Resources, Inc. ("Abtech") for $44,000 in cash and 285,000
shares of common stock. The majority of Abtech's outstanding stock was owned
by the Company's current chief executive officer.
The acquisition was accounted for as a purchase and the purchase price
was allocated to Abtech's principal asset. Abtech's principal asset is a
License Agreement between Abtech and a company which owns a patented process
for the rejection of nitrogen from natural gas. The License Agreement gives
the Company the exclusive right to utilize this rejection process for
conventional natural gas in the Permian Basin and for all coalbed methane or
landfill gas in the continental United States.
The Company is required to pay a license fee based upon throughput
through each processing unit so long as there are any unexpired patents
covering the rejection technology. The Company must have installed or have
commitments to install processing units with a stated minimum capacity as of
December 31, 2002, to maintain the exclusive rights to the process.
(9) Supplemental Disclosures of Cash Flow Information
Cash paid during the periods is as follows:
<TABLE>
<CAPTION>
Nine months ended November 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Interest $95,899 $125,400
Income taxes 35,126 94,500
</TABLE>
In July 1998, the Company issued 48,000 shares of common stock to its
directors as part of their annual compensation.
In August 1998, the Company paid $44,000 cash and issued 285,000 shares
of common stock to acquire Abtech Resources, Inc.
In October 1998, the Company paid cash totaling $537,974 and issued
460,000 shares of common stock in exchange for the retirement of certain
convertible promissory notes, plus accrued interest, and other consideration.
See Note 5.
16
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
QUARTER ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 15,020,114 14,396,700 14,710,396 14,212,300
Add shares issuable pursuant to warrant
agreements less shares assumed repurchased
at the average market price - (1) 23,600 (1) 21,900 (1) 50,600 (1)
Add shares issuable pursuant to stock options
less shares assumed repurchased at the
average market price - (1) 3,100 (1) 2,700 (1) 13,800 (1)
Add shares issuable from assumed conversion
of convertible notes 31,100 (1) 572,800 (1) 382,700 (1) 880,100 (1)
----------- ----------- ----------- -----------
Tentative number of shares for computation
of fully diluted earnings per share 15,051,214 14,996,200 15,117,696 15,156,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) applicable to common stock $ (950,572) $ 62,700 $(1,729,819) $ (122,400)
Add back interest expense for convertible
promissory notes assumed converted 4,500 (1) 34,100 (1) 38,500 (1) 157,700 (1)
----------- ----------- ----------- -----------
Tentative earnings (loss) for computation of
fully diluted earnings per share $ (946,072) $ 96,800 $(1,691,319) $ 35,300
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings (loss) per common share $ (0.06) $ 0.01 $ (0.12) $ (0.01)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings (loss) per common share $ (0.06) $ 0.01 $ (0.12) $ (0.01)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(1) Not used in fully diluted earnings per share calculations as
effect would be antidilutive.
17
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
EXHIBIT 21
SUBSIDIARIES
<TABLE>
<CAPTION>
COMPANY STATE PERCENT OWNED
------- ----- -------------
<S> <C> <C>
Gateway Energy Corporation Delaware
Gateway Processing Company Texas 100%
Gateway Pipeline Company Texas 100%
Gateway Energy Marketing Company Texas 100%
Fort Cobb Fuel Authority, L.L.C. Oklahoma 100%
Gateway Offshore Pipeline Company Nebraska 100%
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 1,864,236
<SECURITIES> 0
<RECEIVABLES> 1,575,231
<ALLOWANCES> 0
<INVENTORY> 84,218
<CURRENT-ASSETS> 3,537,546
<PP&E> 11,034,113
<DEPRECIATION> 2,442,491
<TOTAL-ASSETS> 12,819,932
<CURRENT-LIABILITIES> 1,897,052
<BONDS> 1,075,085
0
0
<COMMON> 3,810,633
<OTHER-SE> 6,037,162
<TOTAL-LIABILITY-AND-EQUITY> 12,819,932
<SALES> 5,087,566
<TOTAL-REVENUES> 6,063,652
<CGS> 3,767,489
<TOTAL-COSTS> 4,741,000
<OTHER-EXPENSES> 2,928,843<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,157<F3>
<INCOME-PRETAX> (1,716,922)
<INCOME-TAX> 12,897
<INCOME-CONTINUING> (1,729,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,729,819)<F2>
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1>INCLUDES $489,968 OF NON-CASH EXPENSES.
<F2>INCLUDES $601,721 OF NON-CASH EXPENSES.
<F3>INCLUDES $111,753 OF NON-CASH EXPENSES.
</FN>
</TABLE>
