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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 JUNE 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 July 1, 1996, the Registrant had approximately 1,025,000 shares
of Common Stock outstanding.
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Gateway Industries, Inc.
Index
Part 1 - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet - June 30, 1996........ 3
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1996 and 1995... 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995.................... 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis or Plan of Operations 9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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Gateway Industries, Inc.
Condensed Consolidated Balance Sheet
(Unaudited)
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 498,000
Accounts receivable, less allowance for doubtful accounts of
$415,000 2,110,000
Inventories (Note 2) 2,617,000
Prepaid expenses and other current assets 407,000
----------------
Total current assets 5,632,000
Property, plant and equipment, at cost, less accumulated
depreciation (Note 3) 6,609,000
----------------
Total assets $ 12,241,000
================
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 1,006,000
Accrued expenses and other liabilities 756,000
Short-term financing (Note 4) 3,214,000
Bond payable (Note 5) 4,780,000
Current portion of capital lease obligations 120,000
----------------
Total current liabilities 9,876,000
Accounts payable, less current portion 300,000
Capital lease obligations, less current portion 144,000
Other long-term liabilities 70,000
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Total liabilities 10,390,000
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,
1,023,500 shares issued and outstanding 1,000
Capital in excess of par value 3,920,000
Accumulated deficit (2,024,000)
Treasury stock (46,000)
----------------
Total shareholders' equity 1,851,000
----------------
Total liabilities and shareholders' equity $ 12,241,000
================
</TABLE>
See accompanying notes.
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Gateway Industries, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 3,968,000 $ - $ 8,399,000 $ -
Cost of sales 3,604,000 - 7,536,000 -
Gross profit 364,000 - 863,000 -
Sales and marketing 335,000 - 693,000 -
General and administrative expenses 652,000 3,000 1,063,000 46,000
Operating loss (623,000) (3,000) (893,000) (46,000)
Other income (expense):
Interest income 8,000 45,000 15,000 93,000
Interest expense (192,000) - (377,000) -
Other income 2,000 - 1,000 -
Total other income (expense) (182,000) 45,000 (361,000) 93,000
Net income (loss) $ (805,000) $ 42,00 $ (1,254,000) $ 47,000
================ ============== ================ ===============
Net income (loss) per share $ (.79) $ .04 $ (1.22) $ .05
================ ============== ================ ===============
Weighted average number of shares
outstanding 1,024,000 1,035,000 1,024,000 1,035,000
================ ============== ================ ===============
</TABLE>
See accompanying notes.
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Gateway Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30
1996 1995
---------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (1,254,000) $ 47,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 173,000 1,000
Changes in operating assets and liabilities:
Accounts receivable 90,000 -
Inventories 171,000 -
Prepaid expenses and other current assets (97,000) 43,000
Accounts payable 397,000 (40,000)
Accrued expenses and other liabilities 144,000 (44,000)
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Net cash used in operating activities (376,000) (40,000)
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Cash flows from investing activities
Purchase of machinery and equipment (68,000) -
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Net cash used in investing activities (68,000) -
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Cash flows from financing activities
Share issuance expenses (30,000) -
Purchase of treasury stock (46,000) -
Repayments of capital lease obligations (116,000) -
Repayments of short-term financing (8,569,000) -
Proceeds from short-term financing 8,855,000 -
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Net cash provided by financing activities 94,000 -
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Increase (decrease) in cash and cash equivalents (350,000) 7,000
Cash and cash equivalents at beginning of year 848,000 3,474,000
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Cash and cash equivalents at end of year $ 498,000 $ 3,481,000
================ ==============
See accompanying notes.
</TABLE>
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Gateway Industries, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 six months ended June 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 June 30, 1996 are as follows:
Raw materials $ 1,586,000
Work in process 307,000
Finished goods 724,000
$ 2,617,000
===================
3. Property, Plant and Equipment
The major components of property, plant and equipment at June 30, 1996 are as
follows:
Estimated Useful
Lives
in Years
-----------------
Building $ 5,196,000 40
Machinery and equipment 1,510,000 7
Office furniture and equipment 105,000 7
6,811,000
-----------------
Accumulated depreciation (202,000)
$6,609,000
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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 $2,764,000 were outstanding as of June 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 expires in October 1996.
In addition, Marsel has a term loan with the domestic lender aggregating
$450,000 at June 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 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 domestic 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 collateralized 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. The outstanding principal balance as
of June 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.
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Gateway Industries, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
6. Rights Offering
Gateway Industries, Inc. (the "Company"), distributed to holders of record of
shares of its common stock (the "Common Stock"), as of June 27, 1996 (the
"Record Date"), transferable subscription rights (the "Rights") to purchase
additional shares of Common Stock (the "Basic Subscription Privilege") at a
price of $2.25 per share (the "Subscription Price"). Stockholders will be
entitled to three rights for each share of Common Stock held on the Record Date.
Each Right will entitle its holder (a "Holder") to purchase one share of Common
Stock (collectively the "Underlying Shares").
Upon exercise of the Basic Subscription Privilege, a Holder will also be
entitled to purchase at the Subscription Price a pro-rata portion of any
Underlying Shares that are not otherwise subscribed for pursuant to the exercise
of Basic Subscription Privileges (the "Oversubscription Privilege"; and
collectively, with the Basic Subscription Privilege and the sale of shares of
Common Stock in connection therewith, the "Rights Offering").
The Rights will expire on August 23, 1996. As of June 30, 1996, the Company had
not received any proceeds from the Rights Offering. As of June 30, 1996, costs
incurred with respect to the Offering amounted to approximately $30,000.
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 six months ended June 30,
1995, assuming the purchase of Marsel had been consummated as of January 1,
1995, are as follows (in thousands, except per share data):
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The financial statements included in this Report as of, and for the
quarter ended, June 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 $3,968,000 for the quarter ended June 30, 1996, which
represents a 28% decrease from Old Marsel's net sales for the comparable quarter
last year. Net sales for the six month end period were $8,399,000 representing a
25% decrease from old Marsel's net sales for the comparable six month period
last year. Management believes that the decline resulted primarily because Old
Marsel, prior to its acquisition by the Company on 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 9.2% for the quarter ended June 30, 1996, lower
than Old Marsel's historical norms. Management believes that gross profit margin
for the quarter was negatively impacted by reduced level of 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 $623,000
and a net loss (before taxes) but after interest of $805,000. For the six month
period, the Company experienced an operating loss of $893,000 and a net loss
(before taxes) but after interest of $1,254,000. The losses were principally the
result of lower revenues.
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Liquidity and Capital Resources
The Company's consolidated net working capital deficit at June 30, 1996
was $4,244,000, which included cash of $498,000 held by the Company and reflects
the classification of $4.78 million, the entire amount due under the IDA Bonds,
as current.
Since December 31, 1995, net working capital declined by $1,225,000 as
a result of losses sustained by the Company during the quarter. Sources of cash
for Marsel include income for operations, if any, and borrowings under the
Commercial Loan Agreement, as defined below.
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") providing for revolving loans 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
terminates on October 31, 1996. As of June 30, 1996, $2,764,000 and $450,000
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 March 31, 1996 was
$4,780,000 plus accrued interest of $45,000. 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 Loan Agreement provides that the L/C Bank must renew the L/C
annually 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. As set forth below, Marsel is not in
compliance with such covenants. 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. If the L/C is not renewed, all amounts due under the Bonds will
become due and payable. In such event, the Company will require financing. There
can be no assurance that such financing could be obtained, or, if obtained,
would be on advantageous terms.
The Loan Agreements contain various covenants relating to Marsel's
performance and financial condition. At June 30, 1996, Marsel was not in
compliance with certain of such covenants. The Company is negotiating with each
of the Banks to waive such non-compliance or to modify the covenants. If such
waivers or modifications are not
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received, each Bank could declare all outstanding amounts immediately due and
payable. The Company does not have the financial resources to make such payments
and there can be no assurance that it could obtain financing to do so.
The Company commenced 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. If
the Rights Offering is fully subscribed, the net proceeds to the Company will be
approximately $6,900,000.
Management has not yet decided how to allocate the proceeds of the
Offering. If it does not use such proceeds for Marsel, and the Banks declare the
Loans to be in default, or fail to renew the Loan Agreements, the company will
be required to repay its indebtedness to the Banks. The Company does not have
the resources to make such repayments and would require financing to do so.
There can be no assurance that such financing could be obtained, or, if
obtained, would be on advantageous terms. Therefore, the Company may not have
adequate liquidity to fund operations or growth.
In addition, if the Company 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 at current levels.
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.
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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: August 16, 1996 By: /s/ Warren G. Lichtenstein
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Warren G. Lichtenstein
Chairman of the Board
and Principal Financial
and Accounting Officer
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