<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, 1999
[ ] 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 October 14, 1999, the Issuer had 15,312,262 shares of its
common stock outstanding.
Transitional Small Business Disclosure Format: Yes X No
----- -----
<PAGE>
FORM 10-QSB
PART I
ITEM 1. FINANCIAL STATEMENTS
Page
Unaudited Consolidated Balance Sheet
as of August 31, 1999. 3
Unaudited Consolidated Statements of Operations for
the three months and six months ended August 31, 1999
and August 31, 1998. 4
Unaudited Consolidated Statements of Cash Flows for
the six months ended August 31, 1999
and August 31, 1998. 5
Notes to Consolidated Financial Statements 6
2
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1999
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents..................................... $ 41,831
Certificates of deposit....................................... 951,483
Trade accounts receivable..................................... 1,028,013
Notes receivable, current portion............................. 7,537
Inventories .................................................. 74,529
Prepaid expenses and other assets ............................ 126,208
------------
Total current assets..................................... 2,229,601
------------
Property and Equipment - at cost
Gas gathering, processing and transportation.................. 10,021,820
Equipment and office furniture................................ 660,361
------------
10,682,181
Less accumulated depreciation................................. 2,853,108
------------
7,829,073
------------
Other Assets
Notes receivable, less current portion........................ 119,791
Equity investment in partnership.............................. 320,973
Other......................................................... 351,633
------------
792,397
------------
$10,851,071
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.............................................. $ 1,076,038
Notes payable................................................. 233,500
Current maturities of long-term debt.......................... 116,368
Accrued expenses and other liabilities........................ 27,686
------------
Total current liabilities................................ 1,453,592
------------
Long-term Debt, less current maturities.......................... 1,027,180
------------
Stockholders' Equity
Common stock- $0.25 par value; 17,500,000 shares
authorized; 15,312,262 shares issued and outstanding...... 3,828,066
Additional paid-in capital.................................... 15,961,417
Accumulated deficit........................................... (11,419,184)
------------
8,370,299
------------
$ 10,851,071
============
The accompanying notes are an integral part of this statement.
3
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating revenues
Natural gas sales .................... $ 1,654,712 $ 2,166,900 $ 2,697,017 $ 3,497,700
Transportation and processing ........ 240,817 361,500 565,523 528,800
Other ................................ 47,932 5,903 100,115 10,234
----------- ----------- ----------- -----------
1,943,461 2,534,303 3,362,655 4,036,734
Operating costs and expenses
Cost of natural gas purchased ........ 1,255,101 1,535,600 2,086,063 2,596,000
Operation and maintenance ............ 282,692 328,400 568,654 602,500
Depreciation and amortization ........ 237,137 185,400 384,395 363,100
General and administrative ........... 491,485 709,500 999,615 1,244,600
Settlement of Rosenthal lawsuit ...... 314,655 - 363,977 -
----------- ----------- ----------- -----------
2,581,070 2,758,900 4,402,704 4,806,200
----------- ----------- ----------- -----------
Operating loss ........................... (637,609) (224,597) (1,040,049) (769,466)
Other income (expense)
Interest income ...................... 19,111 71,200 39,931 150,700
Interest expense ..................... (40,353) (85,400) (79,480) (198,200)
Equity in earnings of partnership .... 23,904 20,497 43,976 43,066
Other income (expense), net .......... 800 - 6,420 -
----------- ----------- ----------- -----------
3,462 6,297 10,847 (4,434)
----------- ----------- ----------- -----------
Loss before income taxes ................. (634,147) (218,300) (1,029,202) (773,900)
Income taxes ............................. (112) 4,400 - 5,300
----------- ----------- ----------- -----------
Net loss ................................. $ (634,035) $ (222,700) $(1,029,202) $ (779,200)
=========== =========== =========== ===========
Basic and diluted loss per share ......... $ (0.04) $ (0.02) $ (0.07) $ (0.05)
=========== =========== =========== ===========
</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>
SIX MONTHS ENDED AUGUST 31,
1999 1998
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
Cash flows from operating activities
Net loss ........................................................ $(1,029,202) $ (779,200)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Equity in undistributed earnings of partnerships ............. (37,587) 1,264
Depreciation and amortization ................................ 384,395 363,100
Non-cash expenses, net ....................................... 13,835 106,936
Assignment of notes receivable to settle Rosenthal lawsuit ... 213,607 -
Other ........................................................ 1,187 (8,000)
Net change in cash and cash
equivalents, resulting from changes in:
Trade accounts receivable ................................. (187,483) (466,800)
Inventories ............................................... 3,783 23,200
Prepaid expenses and other current assets ................. 49,586 (12,700)
Accounts payable .......................................... 469,523 31,700
Accrued expenses and other liabilities .................... (56,414) 16,900
----------- -----------
Net cash used in operating activities ................ (174,770) (723,600)
----------- -----------
Cash flows from investing activities
Capital expenditures ......................................... (222,798) (408,700)
Property retirements ......................................... 20,240 -
Acquisition of business ...................................... - (44,000)
Collections of notes receivable .............................. 44,531 646,400
(Increase) decrease in certificate of deposit ................ (23,283) 1,350,000
----------- -----------
Net cash from (used in) investing activities ......... (181,310) 1,543,700
----------- -----------
Cash flows from financing activities
Proceeds from borrowings ..................................... 233,500 341,300
Payments on borrowings ....................................... (59,282) (1,294,600)
----------- -----------
Net cash used in financing activities ................ 174,218 (953,300)
----------- -----------
Net change in cash and cash equivalents ...................... (181,862) (133,200)
Cash and cash equivalents at beginning of period ............. 223,693 439,800
----------- -----------
Cash and cash equivalents at end of period ................... $ 41,831 $ 306,600
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Principles of Consolidation and Nature of Business
The consolidated financial statements include the accounts of Gateway
Energy Corporation and its wholly owned subsidiary companies, Gateway Pipeline
Company, Gateway Offshore Pipeline Company, Gateway Energy Marketing Company,
Fort Cobb Fuel Authority, L.L.C. and Gateway Processing Company, plus a small
amount of activity in its two remaining joint ventures and one partnership.
Based on its ownership, the Company proportionally consolidates its joint
venture interests, and accounts for its partnership interest on the equity
method. All significant intercompany transactions have been eliminated in
consolidation.
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, 1999.
Certain minor reclassifications to the prior period statements have been made to
conform with the August 31, 1999 presentation.
The Company owns and operates natural gas gathering, transportation and
distribution systems and related facilities in Texas, Oklahoma and Louisiana,
and offshore in state and federal waters of the Gulf of Mexico. The Company also
operates a natural gas distribution company in Oklahoma.
(2) Earnings Per Share
Basic earnings per share is computed by dividing 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 shares outstanding, after giving effect to
potentially dilutive common share equivalents outstanding during the period.
Potentially dilutive common share equivalents are not included in the
computation of diluted earnings per share if they are anti-dilutive. For the
three-month and six-month periods ended August 31, 1999 and 1998, 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 August 31, 1999 and 1998 and the six-month periods ended August 31, 1999
and 1998 were 15,259,936, 14,659,800, 15,251,215, and 14,557,300, respectively.
(3) Notes Payable
The Company has an operating line of credit with a bank that provides
for maximum borrowings of $500,000 through February 2000. Interest is payable
monthly at 6.4% per
6
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. At August 31,
1999, the Company had available borrowing capacity under the line of credit
totaling $266,500.
(4) Commitments and Contingencies
In its Form 10-KSB for the fiscal year ended February 28, 1999, the
Company reported on a legal action entitled STANLEY ROSENTHAL V. SHOREHAM
PIPELINE COMPANY, which was filed in District Court of Milam County, Texas on
September 23, 1994. Mr. Rosenthal alleged that he had an agreement with Shoreham
Pipeline Company to provide natural gas from a gas gathering system known as the
Rockdale System. Shoreham Pipeline and the Company acquired the Rockdale System
on October 1, 1994 through a joint venture managed and operated by Shoreham
Pipeline. Mr. Rosenthal alleged that Shoreham Pipeline failed to provide natural
gas to him causing alleged damage to him. Mr. Rosenthal alleged fraud, negligent
misrepresentation, breach of contract, unlawful discrimination and violations of
the Texas Deceptive Trade Practices Act ("TDTPA").
In August 1996, Mr. Rosenthal joined the Company as a defendant.
Company management and its counsel believed that a contract did not exist
between Rosenthal and Shoreham Pipeline and consequently Mr. Rosenthal could not
have been damaged in the manner that he alleged. Nonetheless, on May 20, 1999
following a trial on the issues, the jury in the action awarded actual damages
to Mr. Rosenthal in the amount of $1,656,072 and exemplary damages and damages
under the TDTPA which when tripled represented $1,500,000 against each of
Shoreham Pipeline and the Company. A final judgment was entered on July 28, 1999
as noted above, except that no TDTPA damages were awarded, but exemplary damages
were allowed in the amount of $750,000 against each of Shoreham Pipeline and the
Company.
On September 13, 1999, in an attempt to avoid further costly
litigation, the Company entered into mediation with Rosenthal and Shoreham to
settle all claims between the parties. As a result of the mediation, Rosenthal
agreed to dismiss the Company from the lawsuit, and the Company and Rosenthal
agreed to release each other from any and all claims related to the
aforementioned action. In consideration, the Company agreed to assign without
recourse its right to receive payments for the monthly periods from October 1,
1999 through November 1, 2001 to which it is entitled under its note receivable
from Shoreham dated November 18, 1998 in the original principal amount of
$400,000. Such payments include interest at an annual rate of 7% and total
$249,662. The Company will retain its right to receive the payments, totaling
$124,831, due for the monthly periods from December 1, 2001 through December 1,
2002. In addition, the Company and Shoreham have agreed to release each other
from any claims or controversies that exist or may arise from the lawsuit. The
execution of the final documents and the filing of the releases with the court
is expected within 15 days.
The accompanying financial statements reflect a charge to earnings for
$213,607 reflecting the assignment to Rosenthal of the principal portion of the
note receivable from Shoreham, plus related legal fees for the three-month and
six-month periods ended August 31, 1999 of $101,048 and $150,370, respectively.
7
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(5) Long-term Debt
Long-term debt at August 31, 1999 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Subordinated notes $1,047,119
Note payable to PCI 96,429
----------
1,143,548
Less current maturities 116,368
----------
$1,027,180
==========
</TABLE>
(6) Supplemental Disclosures of Cash Flow Information
Cash paid during the periods is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
---------------------------
1999 1998
------- --------
<S> <C> <C>
Interest $66,468 $117,600
Income taxes 5,359 12,400
</TABLE>
8
<PAGE>
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
GENERAL
The Company evaluates each of its activities based on the operating
margin it produces. The Company defines operating margin as revenues, less
the cost of purchased gas and operating and maintenance expenses. Management
reviews and evaluates the operations of three main segments--onshore
operations, offshore operations and Fort Cobb operations.
THREE MONTHS ENDED AUGUST 31, 1999 COMPARED TO AUGUST 31, 1998
TOTAL OPERATIONS
The following table sets forth information for the three months
ended August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues.................................... $ 1,943,461 $ 2,534,303
Operating margins........................... 405,668 670,303
Depreciation................................ 237,137 185,400
</TABLE>
Operating margins for the three months ended August 31, 1999
decreased $265,000 compared to the same period of the prior year. Onshore
operations margins increased $64,000 while Offshore operations margins
declined $133,000 and Fort Cobb margins declined $196,000. In fiscal 2000
to-date, the lower oil and gas prices of last year and the resultant level of
offshore drilling and development have negatively impacted the Company.
Additionally, operating margins from Fort Cobb were lower than last year as
relatively wetter weather delayed the summer irrigation season. 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. Operating costs for the period declined $46,000 from
the same quarter of the prior year. The Company also continues to actively
pursue acquisition opportunities that would provide attractive returns
utilizing creative financing options. The segments are discussed individually
below in greater detail. The change in depreciation is due primarily to
year-to-date expense adjustments recognized in the second quarter.
9
<PAGE>
ONSHORE OPERATIONS
The following table sets forth information for the three months ended
August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues.................................... $ 1,312,404 $ 1,318,493
Operating margins........................... 315,881 251,472
Depreciation................................ 148,344 115,158
</TABLE>
Operating margins for onshore operations increased in the second
quarter of the fiscal year by $64,000 over the same period of the prior year.
The main increases were due to new throughput volumes on the Company's Leleux
system in Louisiana, and additional volumes on the Waxahachie system in
Texas, partially offset by the impact of throughput fluctuations on several
systems.
OFFSHORE OPERATIONS
The following table sets forth information for the three months
ended August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues.................................... $ 90,885 $ 240,557
Operating margins........................... (10,533) 122,229
Depreciation................................ 45,299 30,361
</TABLE>
Operating margins for offshore operations decreased $133,000 in the
second quarter of the fiscal year compared to the same period of the prior
year, and are directly related to throughput volumes. Because many
exploration companies curtailed capital spending programs when oil prices
fell to record lows in the fall of 1998, development drilling by unaffiliated
producers did not offset normal production declines during the period. Since
oil prices have rebounded to more reasonable levels, the Company expects to
see an increase in the level of drilling by producers in the Gulf of Mexico,
which is likely to impact favorably its offshore operations.
FORT COBB OPERATIONS
The following table sets forth information for the three months ended
August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues.................................... $ 540,172 $ 975,253
Operating margins........................... 100,320 296,602
Depreciation................................ 43,494 39,881
</TABLE>
Operating margins for Fort Cobb operations decreased in the second
quarter of the fiscal year by $196,000 compared to the same period of the
prior year primarily due to declines in volumes delivered to local farmers
for crop irrigation fuel. Since last year Fort Cobb has added some industrial
customers that are expected to increase the fall and winter loads on the
utility.
10
<PAGE>
OPERATIONS SUPPORT
The following table sets forth information for the three months
ended August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
General and administrative.................. $ 491,485 $ 709,500
Settlement of Rosenthal lawsuit............. 314,655 -
Interest income............................. 19,111 71,200
Interest expense............................ (40,353) (85,400)
Equity in partnership....................... 23,904 20,497
Other income (expense)...................... 800 -
</TABLE>
General and administrative expenses for the three months ended
August 31, 1999 declined $218,000 from the same period last year. The decline
is mainly due to last year's expense of moving the Company's corporate
offices to Houston and lower current year legal and other administrative
costs.
Costs of settlement of the Rosenthal lawsuit include the related
legal fees and are described in Note 4 to the Consolidated Financial
Statements.
Interest income varies directly with the balance on deposit in the
Company's certificate of deposit and short-term money market accounts.
Interest expense for the prior period included $25,143 of debt
conversion costs, and $19,000 related to promissory notes no longer
outstanding.
SIX MONTHS ENDED AUGUST 31, 1999 COMPARED TO AUGUST 31, 1998
TOTAL OPERATIONS
The following table sets forth information for the six months ended
August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues.................................... $ 3,362,655 $ 4,036,734
Operating margins........................... 707,938 838,234
Depreciation................................ 384,395 363,100
</TABLE>
Operating margins for the six months ended August 31, 1999 decreased
$130,000 compared to the same period of the prior year. In fiscal 2000 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. Onshore operations margins increased $199,000 while
offshore operations margins declined $79,000 and Fort Cobb margins declined
$250,000. These segments are discussed individually below in greater detail.
11
<PAGE>
ONSHORE OPERATIONS
The following table sets forth information for the six months ended
August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues.................................... $ 2,461,979 $ 2,578,822
Operating margins........................... 644,571 445,193
Depreciation................................ 234,261 222,668
</TABLE>
Operating margins for onshore operations increased in the first half
of the fiscal year by $199,000 over the same period of the prior year. The
main increases were due to new throughput volumes on the Company's Leleux
system in Louisiana, and additional volumes on the Waxahachie system in
Texas, partially offset by the impact of throughput fluctuations on several
systems.
OFFSHORE OPERATIONS
The following table sets forth information for the six months ended
August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues.................................... $ 211,810 $ 286,666
Operating margins........................... 18,375 97,342
Depreciation................................ 66,551 59,982
</TABLE>
Operating margins for offshore operations decreased in the first
half of the fiscal year by $79,000 from the same period of the prior year,
and are directly related to throughput volumes. Because many exploration
companies curtailed capital spending programs when oil prices fell to record
lows in the fall of 1998, development drilling by unaffiliated producers did
not offset normal production declines during the period. Since oil prices
have rebounded to more reasonable levels, the Company expects to see an
increase in the level of drilling by producers in the Gulf of Mexico, which
is likely to impact favorably its offshore operations.
FORT COBB OPERATIONS
The following table sets forth information for the six months ended
August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues.................................... $ 688,866 $ 1,171,246
Operating margins........................... 44,992 295,699
Depreciation................................ 83,583 80,450
</TABLE>
Operating margins for Fort Cobb operations decreased in the first
half of the fiscal year by $250,000 from the same period of the prior year
primarily due to declines in volumes delivered to local farmers for crop
irrigation fuel. Since last year Fort Cobb has added some industrial
customers that are expected to increase the fall and winter loads on the
utility.
12
<PAGE>
OPERATIONS SUPPORT
The following table sets forth information for the six months ended
August 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
General and administrative.................. $ 999,615 $ 1,244,600
Settlement of Rosenthal lawsuit............. 363,977 -
Interest income............................. 39,931 150,700
Interest expense............................ (79,480) (198,200)
Equity in partnership....................... 43,976 43,066
Other income (expense)...................... 6,420 -
</TABLE>
General and administrative expenses for the six months ended August
31, 1999 declined $245,000 from the same period last year. The decline is
mainly due to last year's expense of moving the Company's corporate offices
to Houston and the legal costs related to settlement of issues with Shoreham
Pipeline Company, the Company's former joint venture partner.
Costs of settlement of the Rosenthal lawsuit include the related
legal fees and are described in Note 4 to the Consolidated Financial
Statements.
Interest income varies directly with the balance on deposit in the
Company's certificate of deposit and short-term money market accounts.
Interest expense for the prior period included $78,500 of debt
conversion costs, and $37,000 related to promissory notes no longer
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totaled $174,770 for the six
months ended August 31, 1999, compared to $723,600 for the same period last
year, mainly due to changes in current operating assets and liabilities. The
$130,000 decline in operating margins was virtually offset by lower general
and administrative expenses and other.
The Company has cash and cash equivalents and certificates of
deposit totaling $993,314 at August 31, 1999. The Company has in place an
operating line of credit with a bank for maximum borrowings of up to
$500,000, with available borrowing capacity as of August 31, 1999 of
$266,500, which is collateralized by the Company's certificate of deposit.
The Company's long-term debt to total capitalization ratio at the end of the
period was approximately 11%, which should provide opportunity for the
Company to finance acquisition or construction projects.
Absent acquisitions or significant development projects, the Company
will continue to fund its operations through internally generated funds and
available cash and the certificates of deposit. The Company believes its cash
flows from operations and available cash and certificates of deposit will be
sufficient to fund its ongoing operations for the foreseeable future. Any
significant property acquisitions or development projects will require
outside project financing.
13
<PAGE>
FACTORS AFFECTING FUTURE RESULTS
The Company's strategies for enhancing stockholder value 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 its low debt, available 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.
In order to generate long-term value for its stockholders the
Company must enhance its core assets and acquire 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 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
significantly dependent on natural gas production which is 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 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 from 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 warmer, drier weather in the fall can
significantly reduce demand for natural gas in the Company's retail service
areas.
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 has assessed its risks of
business disruption from the Year 2000 issue by reviewing all hardware and
software in use, remediating when necessary, and testing the corrected
applications. All such applications in use by the Company are Year 2000
ready. Due to the redundancy inherent in the Company's gas supply structure,
the risk to the Company due to lack of preparedness of business partners does
not appear to be material. The Company does not believe that its state of
preparedness, or that of its business partners, will have a material effect
on its operations.
14
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to the Consolidated Financial Statements for a discussion of
the September 13, 1999 settlement of STANLEY ROSENTHAL V. SHOREHAM
PIPELINE COMPANY.
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 Regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
b) Reports on Form 8-K:
September 13, 1999 -- Settlement of STANLEY ROSENTHAL V. SHOREHAM
PIPELINE COMPANY.
15
<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/ Michael T. Fadden
-------------------------------------
President and Chief Executive Officer
/s/ Scott D. Heflin
-------------------------------------
Chief Financial Officer and Treasurer
October 15, 1999
- ---------------------------
(Date)
16
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, SIX MONTHS ENDED AUGUST 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average number of common shares 15,259,936 14,659,800 15,251,215 14,557,300
outstanding
Add shares issuable pursuant to warrant - 34,500 (1) - 46,400 (1)
agreements less shares assumed
repurchased at the average market price
Add shares issuable pursuant to stock - 5,500 (1) - 8,100 (1)
options less shares assumed repurchased
at the average market price
Add shares issuable from assumed
conversion of convertible notes - 624,600 (1) - 695,500 (1)
----------- ----------- ----------- -----------
Tentative number of shares for
computation of diluted earnings per share
15,259,936 15,324,400 15,251,215 15,307,300
=========== =========== =========== ===========
Loss applicable to common stock $ (634,035) $ (222,700) $(1,029,202) $ (779,200)
Add back interest expense for
convertible promissory notes assumed
converted - 13,400 (1) - 36,000 (1)
----------- ----------- ----------- -----------
Tentative earnings (loss) for
computation of diluted earnings per share
$ (634,035) $ (209,300) $(1,029,202) $ (743,200)
=========== =========== =========== ===========
Basic and diluted loss per common share
$ (0.04) $ (0.02) $ (0.07) $ (0.05)
=========== =========== =========== ===========
</TABLE>
(1) Not used in diluted earnings per share calculations as effect would
be antidilutive.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 41,831
<SECURITIES> 951,483
<RECEIVABLES> 1,035,550
<ALLOWANCES> 0
<INVENTORY> 74,529
<CURRENT-ASSETS> 2,229,601
<PP&E> 10,682,181
<DEPRECIATION> 2,853,108
<TOTAL-ASSETS> 10,851,071
<CURRENT-LIABILITIES> 1,453,592
<BONDS> 1,027,180
0
0
<COMMON> 3,828,066
<OTHER-SE> 4,542,233
<TOTAL-LIABILITY-AND-EQUITY> 10,851,071
<SALES> 3,362,655
<TOTAL-REVENUES> 3,452,982
<CGS> 2,086,063
<TOTAL-COSTS> 2,654,717
<OTHER-EXPENSES> 1,747,987<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,480
<INCOME-PRETAX> (1,029,202)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,029,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,029,202)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
<FN>
<F1>Includes $227,442 of non-cash expenses.
</FN>
</TABLE>
