<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 AND
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-13803
GATEWAY INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0637631
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101-01 Foster Avenue
Brooklyn, New York 11236
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 718-272-9700
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 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 [ ]
Transition Small Business Disclosure Format (check one):
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable data.
As of November 1, 1996, the Registrant had approximately 3,603,000
shares of Common Stock outstanding.
<PAGE>
Gateway Industries, Inc.
Index
<TABLE>
<CAPTION>
Part I--Financial Information Page
----
<S> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet--September 30, 1996 4
Condensed Consolidated Statements of Operations--
Three Months and Nine Months Ended September 30, 1996 and 1995 6
Condensed Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1996 and 1995 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operations 11
Part II--Other Information
Item 3. Defaults upon Senior Securities 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
3
<PAGE>
PART I
FINANCIAL INFORMATION AND FINANCIAL STATEMENTS
Item 1.
Gateway Industries, Inc.
Condensed Consolidated Balance Sheet
(Unaudited)
September 30, 1996
Assets
Current assets:
Cash and cash equivalents $ 6,080,000
Accounts receivable, less allowance
for doubtful accounts of $540,000 2,485,000
Inventories (Note 2) 2,435,000
Prepaid expenses and other current asset 285,000
-----------
Total current assets 11,285,000
Property, plant and equipment, at cost, less
accumulated depreciation (Note 3) 6,537,000
-----------
Total assets $17,822,000
===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,141,000
Accrued expenses and other liabilities 955,000
Short-term financing (Note 4) 3,225,000
Bond payable (Note 5) 4,780,000
Current portion of capital lease obligations 67,000
-----------
Total current liabilities 10,168,000
Accounts payable, less current portion 300,000
Capital lease obligations, less current portion 144,000
4
<PAGE>
Other long-term liabilities 70,000
------------
Total liabilities 10,682,000
Commitments and Contingencies (Notes 4 and 5)
Shareholders' equity (Note 6):
Preferred stock, $.10 par value, 1,000,000
shares authorized, no shares issued and outstanding
Common stock, $.001 par value, 10,000,000 shares
authorized, 3,603,469 shares issued and outstanding 4,000
Capital in excess of par value 9,596,000
Accumulated deficit (2,414,000)
Treasury stock (46,000)
------------
Total shareholders' equity 7,140,000
------------
Total liabilities and shareholders' equity $ 17,822,000
============
See accompanying notes
5
<PAGE>
Gateway Industries, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1996 1995 1996 1995
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 5,048,000 $ -- $ 13,447,000 $ --
Cost of sales 4,643,000 -- 12,179,000 --
------------ ------------ ------------ ------------
Gross profit 405,000 -- 1,268,000 --
Sales and marketing 379,000 -- 1,072,000 --
General and administrative
expenses 255,000 21,000 1,318,000 66,000
------------ ------------ ------------ ------------
Operating loss (229,000) (21,000) (1,122,000) (66,000)
Other income (expense):
Interest income 7,000 47,000 22,000 139,000
Interest expense (197,000) -- (574,000) --
Other income 29,000 -- 30,000 --
------------ ------------ ------------ ------------
Total other income (expense) (161,000) 47,000 (522,000) 139,000
------------ ------------ ------------ ------------
Net income (loss) $ (390,000) $ 26,000 $ (1,644,000) $ 73,000
============ ============ ============ ============
Net income (loss) per share $ (.29) $ .03 $ (1.24) $ .07
============ ============ ============ ============
Weighted average number of shares
outstanding 1,325,000 1,035,000 1,325,000 1,035,000
============ ============ ============ ============
</TABLE>
See accompanying notes.
6
<PAGE>
Gateway Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(1,644,000) $ 73,000
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 259,000 2,000
Changes in operating assets and liabilities:
Accounts receivable (285,000) --
Inventories 353,000 --
Prepaid expenses and other current assets 25,000 63,000
Accounts payable 532,000 (52,000)
Accrued expenses and other liabilities 343,000 (48,000)
----------- -----------
Net cash (used in) provided by operating activities (417,000) 38,000
----------- -----------
Cash flows from investing activities
Purchase of machinery and equipment (82,000) --
----------- -----------
Net cash used in investing activities (82,000) --
----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock 5,779,000 --
Share issuance expenses (130,000) --
Purchase of treasury stock (46,000) --
Repayments of capital lease obligations (169,000) --
Repayments of short-term financing (4,444,000) --
----------- -----------
Proceeds from short-term financing 4,741,000 --
----------- -----------
Net cash provided by financing activities 5,731,000 --
----------- -----------
Increase in cash and cash equivalents 5,232,000 38,000
Cash and cash equivalents at beginning of year 848,000 3,474,000
----------- -----------
Cash and cash equivalents at end of year $ 6,080,000 $ 3,512,000
=========== ===========
</TABLE>
See accompanying notes
7
<PAGE>
Gateway Industries, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
1. General
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instruction to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
interim consolidated financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to make such financial statements
not misleading. Results for the three and nine months ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995.
2. Inventories
The major components of inventories at September 30, 1996 are as follows:
Raw materials $1,602,000
Work in process 316,000
Finished goods 517,000
----------
$2,435,000
==========
3. Property, Plant and Equipment
The major components of property, plant and equipment at September 30, 1996 are
as follows:
Estimated Useful
Lives in Years
--------------
Building $5,196,000 40
Machinery and equipment 1,520,000 7
Office furniture and equipment 109,000 7
----------
6,825,000
Accumulated depreciation (288,000)
==========
$6,537,000
==========
8
<PAGE>
Gateway Industries, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
4. Short-Term Financing
Marsel has a line of credit with a domestic lender aggregating $4,000,000 of
which borrowings of $2,800,000 were outstanding as of September 30, 1996.
Borrowings under the line of credit is limited based on specified percentages of
eligible inventories, accounts receivable and certain other assets of Marsel, as
defined. Interest is payable at the prime rate plus 1-1/2%. Interest rates on
the borrowings ranged from 10% to 10.25% in 1996. The line of credit expired on
October 31, 1996; however, the lender has agreed to forbear exercising any of
its rights and remedies until November 15, 1996. Marsel is in discussion with
the lender to extend such date. If Marsel does not obtain a new commercial loan
by such date (or the extended date), the lender could declare all outstanding
amounts immediately due and payable. Marsel has signed a commitment letter with
a new commercial lender to refinance its working capital needs. Closing of that
loan is subject to various conditions. There can be no assurance that such
financing will be completed.
In addition, Marsel has a term loan with the domestic lender aggregating
$425,000 at September 30, 1996. The term loan is payable in 60 monthly
installments of approximately $8,333 plus interest at the prime rate plus 1-1/2%
through December 1, 2000.
The line of credit and term loan require Marsel, among other conditions, to meet
various financial requirements, including minimum working capital and net worth
as defined. Substantially all of Marsel's non-real estate assets are pledged as
collateral for the outstanding borrowings. Marsel was not in compliance with
certain loan covenants under the arrangement during 1996. Accordingly, the
entire amount due under the term loan has been classified as current.
5. Bond Payable
Marsel has a bond payable with a lender which requires principal payments of
$450,000 per year. Interest is payable at an average rate of 7.5% per annum
through November 1998. In November 1999, the remaining principal balance of
$3,430,000 is due. The bond is secured by a letter of credit at 1% per year. The
bank issuing the letter of credit requires Marsel, among other conditions, to
meet various financial requirements, including minimum working capital and net
worth as defined. Marsel's reimbursement obligations under the letter of credit
are collateralized by all of Marsel's real estate related assets. The letter of
credit expires on December 1, 1996. The outstanding principal balance as of
September 30, 1996 approximated $4,780,000. Marsel was not in compliance with
certain covenants under the financing arrangement during 1996. Accordingly, the
entire amount due under the bond has been classified as current. Marsel is
currently in discussion with the Bondholder and the L/C Bank to extend the
maturity dated of the Bonds.
6. Rights Offering
Gateway Industries, Inc. (the "Company") completed a rights offering of
2,568,456 shares of common stock at $2.25 per share in August 1996. Costs
incurred with respect to the registration of the shares amounted to
approximately $130,000.
9
<PAGE>
Gateway Industries, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
7. Pro Forma Information (Unaudited)
On November 22, 1995, the Company acquired certain assets and acquired the
business of Marsel (a manufacturer of mirrors). The operations of Marsel are
included in the consolidated statements of operations from the date of
acquisition. The transaction was accounted for as a purchase.
The pro forma unaudited results of operations for the nine months ended
September 30, 1995, assuming the purchase of Marsel had been consummated as of
January 1, 1995, are as follows (in thousands, except per share data):
1995
----
Revenues $17,000,000
Net loss (369,000)
Net loss per common share (.36)
10
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Introduction
The financial statements included in this Report as of, and for the quarter
ended, September 30, 1996 contain the consolidated financial condition and
results of operation for the Company and its wholly-owned subsidiary, Marsel
Mirror & Glass Products, Inc. ("Marsel"). During the comparable fiscal quarter
last year, the Company had no operating business and a comparison of last year's
quarter with this year's quarter is not meaningful. However, where information
concerning Old Marsel's results of operation are ascertainable and deemed to be
meaningful for an understanding of the Company's business and financial
condition, the following discussion will attempt to compare results from period
to period. The financial data with respect to Old Marsel was not prepared by the
Company or Management and it is assumed, without any independent verification,
to accurately reflect Old Marsel's results in accordance with generally accepted
accounting principles.
Results of Operations
Net sales were $5,048,000 for the quarter ended September 30, 1996, which
represents a 13.6% decrease from Old Marsel's net sales for a comparable quarter
last year. Net sales for the nine month end period were $13,447,000 representing
a 21% decrease from old Marsel's net sales for the comparable nine month period
last year. Management believes that the decline resulted primarily because Old
Marsel, prior to its acquisition by the Company or November 24, 1995, was not
included in the annual programs of several of its larger customers due to their
uncertainty regarding Old Marsel's ability to fill such customer's orders in a
timely and complete manner. Current members of Marsel's new management have met
with such customers in an attempt to restore their confidence in Marsel.
Gross profit margin was 8% for the quarter ended September 30, 1996, lower than
Old Marsel's historical norms. Management believes that gross profit margin for
the quarter was negatively impacted by reduced sales. Marsel is focusing on
increasing sales to new customers and has targeted the home improvement, craft,
and kitchen and bath distribution channels.
For the quarter, the Company experienced an operating loss of $229,000 and a net
loss (before taxes) but after interest of $390,000. For the nine month period,
the Company experienced an operating loss of $1,122,000 and a net loss (before
taxes) but after interest of $1,644,000. The losses were principally the result
of lower revenues.
Liquidity and Capital Resources
The Company's consolidated net working capital surplus at September 30, 1996 was
$1,117,000, which included cash of $6,080,000 held by the Company at the parent
level and reflects the classification of $4,780,000, the entire amount due under
the IDA Bonds, as current.
Since December 31, 1995, net working capital increased by $4,136,000, giving
effect to the net proceeds of the "Rights Offering", offset in part by losses
sustained by Marsel. Sources of cash for Marsel include income from operations,
if any, and borrowings under the Commercial Loan Agreement, as defined below. If
Marsel does not secure a new commercial lender, it will not have sufficient
funds to finance continued operations unless the Company advances such funds.
The Company is exploring its options with respect to such advances, but has not
made any decision to do so. In addition, if Marsel continues to sustain large
operating losses, it may not be able to provide cash to fund its working capital
needs or to continue its operations.
Marsel is party to a loan agreement (the "Commercial Loan Agreement") with a
commercial bank (the "Commercial Lender," and collectively with the L/C Bank,
the "Banks") which provides for revolving loans
11
<PAGE>
of up to $4 million and a term loan of $500,000. The loans are secured by all
Marsel's non-real estate related assets. The Commercial Loan Agreement provides
for revolving loans based upon 50% of Marsel's eligible inventory and 80% of its
eligible accounts receivable. Outstanding amounts under the revolver and term
loan bear interest at 1.5% per annum above the Commercial Lender's prime rate.
The Commercial Loan Agreement terminated on October 31, 1996. Marsel has
received notice from its Commercial Lender of its intention not to renew the
Loan Agreement. However, the lender has agreed to forbear exercising any of its
rights and remedies until November 15, 1996. Marsel is in discussion with the
Commercial Lender to extend such date. If Marsel does not obtain a new
commercial loan by such date (or the extended date), the Commercial Lender could
declare all outstanding amounts immediately due and payable. Marsel does not
have the financial resources to make such payments and there can be no assurance
that it could obtain financing to do so. Marsel has signed a Commitment Letter
with a new commercial lender to refinance its working capital needs. Closing of
that loan is subject to various conditions. There can be no assurance that such
financing will be completed. As of September 30, 1996, $2,800,000 and $425,000
were outstanding under the revolver and term loan, respectively.
Marsel is also a party to an Amended and Restated Loan and Security Agreement
(the "L/C Loan Agreement") with National Bank of Canada (the "L/C Bank"), which
provides for the L/C Bank to issue a letter of credit securing all of Marsel's
obligations under the IDA Bonds, which as of September 30, 1996 was $4,780,000
plus accrued interest of $140,000. Marsel has agreed to reimburse the L/C Bank
for all payments made to or on behalf of Marsel including drawings on the L/C.
Marsel's reimbursement obligations are secured by a lien on all its real estate
related assets. The L/C expires on December 1, 1996.
The L/C Loan Agreement provides that the L/C Bank is required to renew the L/C
annually on or before October 1 if Marsel (a) meets certain financial covenants
and reporting requirements, (b) has met all L/C reimbursement obligations, (c)
either (x) renewed the Commercial Loan Agreement, or obtained a new loan
agreement (in either case on terms reasonably satisfactory to the L/C Bank) to
finance its working needs for at least one year past the then expiration date of
the L/C, or (y) has deposited cash collateral sufficient to make the next annual
payment under the Bonds with the L/C Bank. Marsel has not satisfied the
foregoing conditions, and the L/C Bank did not renew the L/C. Marsel is
currently negotiating with the L/C Bank to extend the L/C. The L/C Bank has
demanded that Marsel make monthly sinking fund payments of $66,000 toward the
next principal payment due on the Bonds, which Marsel has not done. If the L/C
is not renewed, all amounts due under the Bonds will become due and payable. In
such event, Marsel will require financing. Marsel is currently in negotiations
to provide such financing. There can be no assurance that such financing could
be obtained, or, if obtained, would be on advantageous terms.
Marsel has an annual principal payment due of $450,000 and a semi-annual
interest payment of approximately $183,000 also due under the IDA Bond on
November 15, 1996. Marsel does not have the resources to make such payment, and
the Company has not yet determined whether or not to advance funds to Marsel to
make such payment when due. If it does not, Marsel will be in default under the
terms of the IDA Bond and L/C Agreement, which would require Marsel to
immediately repay all indebtedness under such Bond. In such event, Marsel will
require financing. Marsel is currently in negotiations to provide such
financing. There can be no assurance that such financing could be obtained, or,
if obtained, would be on advantageous terms.
In August 1996, the Company completed a Rights Offering whereby each shareholder
of the Company was granted the right to purchase three shares of common Stock
for each share held of record on June 27, 1996, at a purchase price per share of
$2.25. The net proceeds to the Company from the Rights Offering was
approximately $5,649,000. Management has not yet decided how to allocate the
proceeds of the Offering.
12
<PAGE>
PART II
Item 3. Defaults upon Senior Securities.
Marsel does not meet the financial covenants set forth in the Commercial Loan
Agreement and the L/C Loan Agreement. As a result of these Events of Default,
the Commercial Lender may refuse to make further advances to, or to issue
letters of credit on behalf of, Marsel, may accelerate Marsel's payment
obligations and declare all amounts immediately due and payable and may avail
itself of a variety of other remedies.
In addition, the occurrence of the above Events of Default causes an event of
default under the L/C Loan Agreement. During the continuance of such an Event,
the L/C Bank may accelerate all amounts due from Marsel and foreclose its
interest in the collateral securing all amounts due from Marsel. The L/C Bank
may also notify the trustee under the IDA Bonds that the L/C Bank will not
reinstate the interest component of the letter of credit and thereby cause an
acceleration of the Bonds.
Marsel is negotiating with another commercial lender for a new financial
agreement and with the L/C Bank to extend the L/C. See Management's Discussion
and Analysis.
Item 6. Exhibits.
Exhibit 27 -- Financial Data Schedule.
13
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Gateway Industries, Inc.
------------------------
(Registrant)
Date: November 14, 1996 By:/s/ Warren G. Lichtenstein
----------------- --------------------------
Warren G. Lichtenstein
Chairman of the Board
and Principal Financial
and Accounting Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED AS ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,080,000
<SECURITIES> 0
<RECEIVABLES> 3,025,000
<ALLOWANCES> 540,000
<INVENTORY> 2,435,000
<CURRENT-ASSETS> 11,285,000
<PP&E> 6,825,000
<DEPRECIATION> 288,000
<TOTAL-ASSETS> 17,822,000
<CURRENT-LIABILITIES> 10,168,000
<BONDS> 8,216,000
0
0
<COMMON> 4,000
<OTHER-SE> 7,136,000
<TOTAL-LIABILITY-AND-EQUITY> 17,822,000
<SALES> 13,447,000
<TOTAL-REVENUES> 13,447,000
<CGS> 12,179,000
<TOTAL-COSTS> 12,179,000
<OTHER-EXPENSES> 2,305,000
<LOSS-PROVISION> 55,000
<INTEREST-EXPENSE> 574,000
<INCOME-PRETAX> (1,644,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,644,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,644,000)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
