<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 March 31, 2000
[ ] 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 May 11, 2000, the Issuer had 15,312,208 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 March 31, 2000. 3
Unaudited Consolidated Statements of Operations for
the three months ended March 31, 2000
and March 31, 1999. 4
Unaudited Consolidated Statements of Cash Flows for
the three months ended March 31, 2000
and March 31, 1999. 5
Notes to Consolidated Financial Statements 6
</TABLE>
2
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 360,473
Certificates of deposit ..................................... 691,387
Trade accounts receivable ................................... 851,784
Inventories ................................................. 61,781
Prepaid expenses and other .................................. 180,560
------------
Total current assets ................................... 2,145,985
------------
PROPERTY AND EQUIPMENT - AT COST
Gas gathering, processing and transportation ................ 8,643,414
Office furniture and equipment .............................. 664,707
------------
9,308,121
Less accumulated depreciation and amortization .............. (2,852,201)
------------
6,455,920
------------
OTHER ASSETS
Notes receivable ............................................ 119,751
Equity investment in partnership ............................ 276,056
Other ....................................................... 273,261
------------
669,068
------------
$ 9,270,973
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................ $ 798,705
Accrued expenses ............................................ 69,218
Current maturities of long-term debt ........................ 263,932
------------
Total current liabilities .............................. 1,131,855
------------
LONG-TERM DEBT, LESS CURRENT MATURITIES ........................ 594,604
------------
STOCKHOLDERS' EQUITY
Preferred stock - $1.00 par value; 10,000 shares authorized;
no shares issued and outstanding ......................... --
Common stock - $0.25 par value; 17,500,000 shares authorized;
15,312,208 shares issued and outstanding ................. 3,828,052
Additional paid-in capital .................................. 15,961,403
Accumulated deficit ......................................... (12,244,941)
------------
7,544,514
------------
$ 9,270,973
============
</TABLE>
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 MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Operating revenues
Natural gas sales ............................... $ 1,427,302 $ 1,180,934
Transportation and processing ................... 102,478 355,409
Other ........................................... 23,552 60,329
------------ ------------
1,553,332 1,596,672
Operating costs and expenses
Cost of natural gas purchased ................... 1,114,692 857,651
Operation and maintenance ....................... 271,785 285,167
Depreciation and amortization ................... 171,312 200,902
General and administrative ...................... 446,759 489,582
------------ ------------
2,004,548 1,833,302
------------ ------------
Operating loss ...................................... (451,216) (236,630)
Other income (expense)
Interest income ................................. 15,124 21,262
Interest expense ................................ (36,235) (39,503)
Equity in earnings of partnership ............... 19,504 22,557
Other income (expense), net ..................... 159,976 4,000
------------ ------------
158,369 8,316
------------ ------------
Loss before income taxes ............................ (292,847) (228,314)
Income taxes......................................... -- --
------------ ------------
Net loss ............................................ $ (292,847) $ (228,314)
============ ============
Basic and diluted loss per share .................... $ (0.02) $ (0.02)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net loss ............................................................. $ (292,847) $ (228,314)
Adjustments to reconcile net loss to net cash (used) provided
by operating activities:
Equity in undistributed earnings of partnerships .................. (4,841) (597)
Depreciation, depletion and amortization .......................... 171,312 200,902
Gain on sale of properties ........................................ (159,774) --
Non-cash expenses, net ............................................ 23,917 9,418
Net change in cash and cash equivalents, resulting from
changes in:
Trade accounts receivable and other assets ..................... 161,448 450,498
Inventories .................................................... (2,465) 4,209
Prepaid expenses and other ..................................... (43,877) 122,018
Accounts payable ............................................... (13,147) (147,003)
Accrued expenses ............................................... (289,431) (309,173)
----------- -----------
Net cash (used) provided by operating activities .......... (449,705) 101,958
----------- -----------
Cash flows from investing activities
Capital expenditures .............................................. (9,549) (33,543)
Proceeds from sale of properties .................................. 910,000 --
Collections of notes receivable ................................... -- 21,847
Decrease (increase) in certificate of deposit ..................... 282,153 (17,299)
Net cash provided (used) by investing activities .......... 1,182,604 (28,995)
----------- -----------
Cash flows from financing activities
Proceeds from borrowings .......................................... 200,000 --
Payments on borrowings ............................................ (598,515) (26,796)
----------- -----------
Net cash used by financing activities ..................... (398,515) (26,796)
----------- -----------
Net increase in cash and cash equivalents ......................... 334,384 46,167
Cash and cash equivalents at beginning of period .................. 26,089 152,174
----------- -----------
Cash and cash equivalents at end of period ........................ $ 360,473 $ 198,341
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 one joint venture and one partnership.
Based on its ownership, the Company proportionally consolidates its joint
venture interest, 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 ten months ended December
31, 1999. Certain reclassifications to the prior period statements have been
made to conform with the March 31, 2000 presentation.
The Company owns and operates natural gas gathering, transportation and
distribution systems and related facilities in Texas, Oklahoma and Louisiana,
and offshore in Texas 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 months ended March 31, 2000 and 1999, 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 months
ended March 31, 2000 and 1999 was 15,312,208 and 15,242,494.
(3) Notes Payable
The Company had no outstanding current notes payable as of March 31,
2000, but had borrowing capacity available under its operating line of
credit. The line of credit provides for maximum borrowings of $500,000
through June 2001. Interest is payable monthly at 7.06% per
6
<PAGE>
GATEWAY ENERGY
CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
annum and principal is due on demand, or if no demand is made, at maturity.
The line is collateralized by $500,000 of the Company's certificate of
deposit.
(4) Long-term Debt
Long-term debt at March 31, 2000 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Subordinated notes $828,932
Note payable to Pipeline Capital, Inc. 29,604
--------
858,536
Less current maturities 263,932
--------
$594,604
========
</TABLE>
(5) Supplemental Disclosures of Cash Flow Information
Cash paid during the periods is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------------- -----------------
<S> <C> <C>
Interest $31,388 $32,658
Income and franchise taxes 13,809 11,247
</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
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.
7
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
TOTAL OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Revenues.................................. $1,553,332 $1,596,672
Operating margins......................... 166,855 453,854
Depreciation.............................. 171,312 200,902
</TABLE>
Operating margins for the three months ended March 31, 2000 decreased
$287,000 compared to the same period of the prior year. Onshore and Offshore
Operations margins decreased $133,000 and $158,000, respectively, partially
offset by an increase in Fort Cobb margins of $5,000. These segments are
discussed individually below in greater detail. In 2000 the Company continues
to focus on enhancing the profitability of its existing systems by reviewing
and renegotiating marketing and transportation contracts, when appropriate,
and controlling operating and maintenance costs.
ONSHORE OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Revenues................................. $1,169,693 $1,106,416
Operating margins........................ 193,191 326,591
Depreciation............................. 96,333 127,923
</TABLE>
Operating margins for onshore operations decreased in the first quarter
by $133,000 over the same period of the prior year. The main decrease was due
to the termination of a short-term contract for throughput volumes on the
Company's Leleux system in Louisiana. Talks continue with the producer to
restructure the contract and regain some of the throughput volumes.
OFFSHORE OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------------- -------------------
<S> <C> <C>
Revenues.................................. $50,337 $166,819
Operating margins......................... (76,441) 81,723
Depreciation.............................. 32,754 32,661
</TABLE>
Operating margins for offshore operations decreased in the first quarter
by $158,000 over the same period of the prior year, and are directly related
to lower throughput volumes and a non-recurring maintenance expenditure
totaling $62,000. The expected depletion from connected production was not
offset because the offshore development plans of producers were delayed by
the drastic decline in oil prices in the fall of 1998. The Company expects to
see exploration and development activity of unaffiliated producers gain
momentum again as oil prices have rebounded and reached their highest levels
in nine years. The Company is actively pursuing several opportunities
offshore in the Gulf of Mexico.
8
<PAGE>
FORT COBB OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------------- -------------------
<S> <C> <C>
Revenues................................. $333,302 $323,437
Operating margins........................ 50,105 45,540
Depreciation............................. 42,225 40,318
</TABLE>
Operating margins for Fort Cobb operations increased in the first
quarter by $5,000 over the same period of the prior year primarily due to
increases in volumes delivered for residential use.
OPERATIONS SUPPORT
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------------- -------------------
<S> <C> <C>
General and administrative............... $446,759 $489,582
Interest income.......................... 15,124 21,262
Interest expense......................... (36,235) (39,503)
Other income (expense), net.............. 159,976 4,000
</TABLE>
General and administrative expenses for the quarter are 9% lower than
for the same period of last year, due primarily to reductions in outside
professional fees and quarterly shareholder mailings, partially offset by
slightly higher office costs.
Interest income varies directly with the balance on deposit in the
Company's certificate of deposit and short-term money market accounts.
Interest expense fluctuates directly with the amount of outstanding
long-term debt and the amount of borrowings under the Company's operating
line of credit with a bank.
Other income for the quarter includes gain on the sales of Catarina and
Zwolle systems totaling $160,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities totaled $450,000 for the three
months ended March 31, 2000, compared to $102,000 provided by operating
activities for the same period last year. Changes in current asset and
liability accounts accounted for $308,000 of the decrease between the
periods, and the remainder of the decrease was due to the change in operating
margins between the two periods which is discussed by segment in the
preceding section.
The Company has cash and cash equivalents and certificates of deposit
totaling $1,052,000 at March 31, 2000. The Company's operating line of credit
agreement with a bank provides for maximum borrowings of $500,000, through
June 2001, and is collateralized with a certificate of deposit for the same
amount. There were no borrowings outstanding as of March 31, 2000. The
Company's long-term debt to total capitalization ratio was approximately 7%,
which should provide opportunity for the Company to utilize conventional
long-term financing to fund acquisition or construction projects.
9
<PAGE>
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.
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 competitive prices. 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.
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
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 spring and summer growing season and
hot, dry weather in the fall can significantly reduce demand for natural gas
in the Company's retail service areas.
10
<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) Exhibit:
27 Financial Data Schedule.
b) Reports on Form 8-K:
None
11
<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
May 15, 2000
- -------------------
(Date)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GATEWAY
ENERGY CORPORATION FORM 10-QSB FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 360,473
<SECURITIES> 691,387
<RECEIVABLES> 851,784
<ALLOWANCES> 0
<INVENTORY> 61,781
<CURRENT-ASSETS> 2,145,985
<PP&E> 9,308,121
<DEPRECIATION> 2,852,201
<TOTAL-ASSETS> 9,270,973
<CURRENT-LIABILITIES> 1,131,855
<BONDS> 594,604
0
0
<COMMON> 3,828,052
<OTHER-SE> 3,716,462
<TOTAL-LIABILITY-AND-EQUITY> 9,270,973
<SALES> 1,553,332
<TOTAL-REVENUES> 1,747,936
<CGS> 1,114,692
<TOTAL-COSTS> 889,886 <F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,235
<INCOME-PRETAX> (292,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (292,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (292,847)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
<FN>
<F1> INCLUDES $195,229 OF NON-CASH EXPENSES.
</FN>
</TABLE>
