SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-13803
GATEWAY INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 33-0637631
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
150 East 52nd Street
New York, New York 10022
(Address of principal executive offices including zip code)
Issuer's telephone number, including area code: 877-431-2942
Securities registered under Section 12(b) of the Act: NONE.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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 [ ]
Issuer has no continuing operations for its most recent fiscal year.
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant at April 12, 1999 was approximately $2,489,669, based on the average
high/low ask/bid prices of $1.625 for such stock on that date.
As of April 12, 1999, the Registrant had 3,592,024 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional small business disclosure format. Yes [ ] No [X]
GATEWAY INDUSTRIES, INC.
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Description of Business. 2
Item 2. Description of Property. 2
Item 3. Legal Proceedings. 3
Item 4. Submission of Matters to a Vote
of Security Holders. 3
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters. 4
Item 6. Management's Discussion and
Analysis or Plan of Operation. 5
Item 7. Financial Statements 7
Item 8. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure. 7
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With
Section 16(a) of the Exchange Act. 8
Item 10. Executive Compensation 9
Item 11. Security Ownership of Certain Beneficial
Owners and Managers 11
Item 12. Certain Relationships and Related
Transactions. 12
Item 13. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I
ITEM 1. Description of Business
Gateway Industries, Inc. (the "Company") was incorporated in Delaware in
July 1994. The Company currently has no operating business. The Board of
Directors is pursuing various strategic alternatives, including the possible use
of the Company's liquid assets to acquire, merge, or consolidate or otherwise
combine with an operating business or businesses; however, there is no assurance
that any such transaction will be consummated. As of December 31, 1998, the
Company had cash and cash equivalents of $5,140,000.
The Company has no full time employees, although its Chairman and Acting
President devote time to the Company's administrative needs and in exploring
potential acquisitions and combinations.
On October 14, 1997,the Company signed a letter of intent to acquire Only
Multimedia Network, Incorporated ("OMNI"), a privately held company in the
business of providing casting directors with Internet access to text, pictorial
and video information on actors through its CastNet? service. CastNet became
operational recently, and OMNI has had limited revenues therefrom to date.
Pursuant to a letter of intent, the Company advanced $450,000 ($360,000 in 1997)
to OMNI, and OMNI issued a $500,000 secured promissory note.
Omni's financial performance had been less than expected, and the Company
wrote off as uncollectible the $360,000 advanced to Omni as of December 31,
1997. During 1998, the Company and Omni terminated merger discussions. The
Company continued to pursue the amounts advanced to OMNI, and received full
payment of the secured promissory note and related interest in March 1999.
From November 22, 1995 through December 21, 1996, the Company was engaged
in the manufacture and sale of mirror and glass products through its formerly
wholly-owned subsidiary, Marsel Mirror & Glass Products, Inc. ("Marsel"). On
December 21, 1996 the Company sold Marsel with an option to repurchase 50% of
Marsel for $2. The option expires December 21, 1999.
ITEM 2. Description of Property.
The Company occupies offices at 150 East 52nd Street, New York, New York
10022, under a lease agreement extending through March 30, 2001.
ITEM 3. Legal Proceedings.
There are no material pending legal proceedings against the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 1998.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.
MARKET FOR COMMON STOCK
Since November 17, 1994, the Company's Common Stock has been traded
over-the-counter using the symbol "GWAY" on what is commonly referred to as the
"Bulletin Board." The following table sets forth the high and low bid prices
during each quarter of its last two fiscal years, and during the first and
second quarter of 1999 through April 12, 1999, as quoted on the Bulletin Board.
Such prices represent quotations between broker-dealers, do not include retail
markups and markdowns, or any commissions, and do not reflect prices in actual
transactions.
CLOSING BID PRICES
HIGH($) LOW($)
1997
FIRST QUARTER 2.5000 1.5000
SECOND QUARTER 2.1875 2.0000
THIRD QUARTER 2.0000 1.6250
FOURTH QUARTER 3.0000 1.7500
1998
FIRST QUARTER 1.8125 1.8125
SECOND QUARTER 1.8750 1.8750
THIRD QUARTER 1.7500 1.7500
FOURTH QUARTER 1.6500 1.6500
1999
FIRST QUARTER 1.5000 1.5000
SECOND QUARTER (April 12, 1999) 1.6250 1.6250
DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
anticipate doing so in the foreseeable future.
HOLDERS OF RECORD
At April 12, 1999, there were approximately 1,398 holders of the Company's
Common Stock.
ITEM 6. Management's Discussion and Analysis or Plan of Operations
SALE OF OPERATING BUSINESS IN 1996
In December 1996 the Company sold Marsel, its only operating business. The
Company currently has no operating business or revenue producing activities.
Management is pursuing various strategic alternatives which include the possible
use of the Company's remaining net assets to acquire, merge or consolidate with
an operating business or businesses. There can be no assurance, however, that
any such transaction will be consummated. See "Item 1. Description of Business".
Accordingly, a discussion and analysis of the Company's operating results during
its fiscal year ended December 31, 1998 is not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $5,140,000 at December 31,
1998, compared with $5,433,000 at December 31, 1997. The change arose primarily
from the Company's advances in 1997 and 1998 to OMNI (see "Item 1. Description
of Business"), related expenses, and general and administrative expenses.
YEAR 2000 ISSUE
The Company's Year 2000 Project is currently proceeding on schedule. The
Company began its assessment in the Spring of 1998 in response to a need to
address the issue of older computer programs and embedded computer chips'
inability to distinguish between the year 1900 and the year 2000.
The current assessment project schedule is to be Year 2000 compliant by
mid- 1999. Areas deemed critical with potential to affect the Company's ability
to do business (word processing and bookkeeping) are Year 2000 compliant at this
time.
Year 2000 issues as they relate to the physical premises (building power,
incoming phone service, etc. ) are outside the Company's control and
correspondence inquiring as to Year 2000 compliance will be delivered to the
principals of buildings' property management, phone system suppliers, alarm
system supplier, and communications service providers. Because it is not
possible to gauge the readiness of third-party vendors, the Company is in the
process of drafting a contingency plan in the event that the Company's
third-party vendors do not complete their Year 2000 implementations in time.
This contingency plan is scheduled to be drafted and implemented by mid-1999.
The total cost of the required modifications necessary to become Year 2000
compliant is not expected to be material to the Company's financial position.
The total amount expended on the Year 2000 Project through February 1, 1999 was
$2,150 that related to the cost of an allocated portion of updating software and
of a portion of new hardware expenditure.
The failure to correct material Year 2000 problems could result in an
interruption in, or a failure of, certain normal business operations. These
failures could potentially materially affect the Company's results of operations
and financial condition; however , due to the general uncertainty which is
inherent in potential Year 2000 problems, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers, customers or partners, the
Company is unable to determine, at this time, whether the consequences of Year
2000 failures will have a material impact on the Company's results of operations
or financial condition.
Readers should understand that the dates on which the Company believes the
Year 2000 project will be completed are based upon Management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the availability of certain resources, third-party modification plans and other
factors. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of Year 2000 readiness of third-parties
and the inter-connection of businesses, the Company cannot ensure that its
ability to timely and cost effectively resolve problems associated with the Year
2000 issue may not affect its operations and business, or expose it to
third-party liability.
ITEM 7. Financial Statements
The Company's financial statements are filed as part of this Annual Report,
as indicated in the Index to Financial Statements included in the Report.
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Ronald W. Hayes 61 Director
810 Saturn Street
Suite 16-432
Jupiter, FL 33477-4398
Jack Howard 37 Acting President
2927 Montecito Avenue Director
Santa Rosa, CA 95404
Warren G. Lichtenstein 33 Chairman of the Board of
150 East 52nd Street Directors
New York, NY 10022
WARREN G. LICHTENSTEIN was appointed a director of the Company in May 1994
and became Chairman of the Board in October 1995. He served as President and
Director of Marsel from its inception in July 1995 until shortly after the
acquisition of its business in November 1995, and continued as a director until
its disposition in December 1996. Mr. Lichtenstein has been chief executive
officer of the general partner of Steel Partners II, LP, a private investment
firm, since 1993 and Chairman of Steel Partners Services, Ltd., a private
investment firm, since 1993. Mr. Lichtenstein is President and CEO of Rose's
Holdings, Inc., parent of WebBank; and Chairman of Aydin Corporation. He is a
director of Saratoga Spring Water Corporation, Inc. and PLM International.
RONALD W. HAYES was appointed a director of the company in May 1993. Mr.
Hayes is the owner of Lincoln Consultors & Investors, Inc., an investing and
consulting firm.
JACK HOWARD was appointed Acting President of the Company in September
1994. He was elected director of the Company in May 1994. Since 1989, he has
been a principal of Mutual Securities, Inc (securities brokers). Mr. Howard
serves on the Board of Directors of Rose's Holdings, Inc. and Pubco Inc.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater-than 10% shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file. The
Corporation believes that all such reports required to be filed during the
fiscal year ended December 31, 1998 ("Fiscal 1998") were filed on a timely basis
except that each of Messrs. Howard, Lichtenstein, and Hayes inadvertently did
not file a report on a timely basis relating to stock purchased. Upon discovery,
the reports were filed. The Corporation's belief is based solely on its review
of Forms 3, 4, and 5 and amendments thereto furnished to the Corporation during,
and with respect to, Fiscal 1998 by persons known to be subject to Section 16 of
the Exchange Act. To the Company's knowledge, based solely on its review of the
copies of such reports furnished to the Company, during its fiscal year ended
December 31, 1998 all Section 16(a) filing requirements applicable to its
officers, directors and greater-than 10% beneficial owners were satisfied.
BOARD AND COMMITTEE MEETINGS
The Board of Directors of the Company held two formal meetings during its
fiscal year ended December 31, 1998. Presently, the Board of Directors has no
standing committees. No director attended less than 75% of the total number of
Board meetings held during the fiscal year.
ITEM 10. Executive Compensation
The following table sets forth all compensation paid to the Company's Acting
President during its fiscal year ended December 31, 1998. No other executive
officer received annual compensation at the rate of $100,000 or more during the
fiscal year.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
Compensation
Awards
Fiscal Salary Bonus All Other
Name and Principal Position Year Compensation Options
- --------------------------- ---- ------------ -------
Jack Howard, 1998 - $50,000 -
Acting President 1997 - $50,000 -
OPTION GRANTS IN LAST FISCAL YEAR
None
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
The following table sets forth information concerning options exercised
during the fiscal year ended December 31, 1998 and the number of unexercised
options held by the Company's executive officers at the end of such fiscal year:
<TABLE>
<CAPTION>
Value of
Number Number of Unexercised
of Unexercised in-the-Money
Shares Shares Options at Options at
Acquired Value FY-End FY-End($)
On Realized
Name Exercise ($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack Howard 0 0 82,834/16,666 0/0
Acting President
Warren G. Lichtenstein 0 0 100,000/0 0/0
Chairman of the Board
<FN>
- -----------
(1) Based on $1.6875, the average high/low bid prices for the Common Stock on
the last date of 1998 for which trading was reported.
</FN>
</TABLE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 31, 1999 regarding
the beneficial ownership of the Common Stock by each person known by the Company
to own beneficially more than 5% of the Common Stock, by each director and
executive officer, individually, and by all directors and executive officers as
a group. Shares listed below have been adjusted to reflect the one-for-five
split effective September 22, 1994.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
Warren G. Lichtenstein
150 East 52nd Street
New York, NY 10022 1,815,760 (1)(2) 50.5%
Ronald W. Hayes
810 Saturn Street
Suite 16-432
Jupiter, FL 33477-4398 103,340 (3) 2.9%
Jack Howard
2927 Montecito Avenue
Santa Rosa, CA 95404 140,820 (4) 3.9%
Steel Partners II, L.P.
750 Lexington Avenue
New York, NY 10022 1,674,208 38.7%
George Soros
888 Seventh Avenue
New York, NY 10022 827,716 (5) 23.0%
All directors and executive officers
as a group (three persons) 2,059,920 (1) 57.3%
(1) Includes: (i) 1,674,208 shares owned by Steel Partners II, L.P., an entity
controlled by Mr. Lichtenstein, (ii) 41,552 shares owned directly by Mr.
Lichtenstein, and (iii) 100,000 shares underlying stock options.
(2) More than one beneficial owner is listed above for the same securities,
since the shares owned beneficially by Steel Partners II, L.P. are included in
the shares beneficially owned by Mr. Lichtenstein. See note (1) above.
(3) Includes 8,333 shares which may be acquired in 120 days through the exercise
of stock options.
(4) Includes 16,667 shares which may be acquired in 120 days through the
exercise of stock options.
(5) As reported in the shareholder's most recent Schedule 13D.
ITEM 12. Certain Relationships and Related Transactions
The Company leases offices at 150 East 52nd Street, New York, NY 10022
under a lease expiring March 30, 2001, at an annual cost of approximately
$100,000. It sub-leases offices, at one-third of its cost for the space, to
Steel Partners Services, Ltd., an entity controlled by Mr. Lichtenstein, and it
also sub-leases offices, at one-third of its cost for the space, to Rose's
Holdings, Inc., a company in which Steel Partners II, L.P., and entity
controlled by Mr. Lichtenstein, has an approximately 22% beneficial interest and
of which he and Mr. Howard are directors.
During the year ended December 31, 1998, the Company paid approximately
$147,000 to a company affiliated with Mr. Lichtenstein, Steel Partners Services,
Ltd., for certain general administrative services. This price for general
administrative services is on par with administrative services charged to other
companies for similar services.
ITEM 13. Exhibits, Lists and Reports on Form 8-K
(a) Exhibits
See exhibits index immediately following the signature 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 INDUSTRIES, INC.
Date: May 3, 1999
By:/s/Jack L. Howard
Jack L. Howard,
Acting President
Principal Executive Officer
Date: May 3,1999
By:/s/Warren G. Lichtenstein
Warren G. Lichtenstein,
Chairman of the Board and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: May 3, 1999
/s/ Jack L. Howard
Jack L. Howard
Director
Date: May 3, 1999
/s/ Warren G. Lichtenstein
Warren G. Lichtenstein
Director
Date: May 3, 1999
/s/ Ronald W. Hayes
Ronald W. Hayes
Director
EXHIBIT INDEX
2.1 Agreement and Plan of Merger of Gateway Industries, Inc., a Delaware
Corporation, and Gateway Communications, Inc., a California Corporation.
(a)
3.1 Articles of Incorporation. (a)
3.2 By laws. (a)
10.8 Amended and Restated 1990 Incentive Stock Option Plan and 1990 Nonstatutory
Stock Option Plan. (a)
10.9 Form of Indemnity Agreement between the Registrant and certain of its
Officers and Directors. (c)
10.11Stock Purchase Agreement, dated December 21, 1996, between Gateway
Industries, Inc. and Richard A. Hickland. (d)
27 Financial Data Schedule (f)
- ---------------
(a) Filed as an exhibit to the Company's Proxy Statement for its Special Meeting
of Shareholders held on September 9, 1994, and incorporated herein by reference.
(b) Filed as an exhibit to the Company's Form 10-KSB filed for its quarter ended
March 31, 1996, and incorporated herein by reference.
(c) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended June
30, 1989, and incorporated herein by reference.
(d) Filed as an exhibit to the Company's Form 8-K filed on or about January 5,
1997, and incorporated herein by reference.
(e) Filed as an exhibit to the Company's 10-KSB filed on or about March 31,
1998, and incorporated herein by reference.
(f) Filed herein.
INDEX TO FINANCIAL STATEMENTS
GATEWAY INDUSTRIES, INC.
Report of Independent Auditors F-2
Balance Sheet at December 31, 1998 F-3
Statements of Operations for the years ended
December 31, 1998 and 1997 F-4
Statements of Shareholder's Equity for the years ended
December 31, 1998 and 1997 F-5
Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-6
Notes to Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Gateway Industries, Inc.
We have audited the accompanying balance sheet of Gateway Industries, Inc. as of
December 31, 1998 and the related statements of operations, shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gateway Industries, Inc. at
December 31, 1998 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
Ernst & Young LLP
Los Angeles, California
April 6, 1999
<PAGE>
<TABLE>
GATEWAY INDUSTRIES, INC.
Balance Sheet
December 31, 1998
<CAPTION>
Assets
<S> <C>
Cash and cash equivalents .................................................... $ 5,140,000
Note receivable .............................................................. 566,000
Prepaid expenses and other current assets .................................... 28,000
Total current assets ....................................................... 5,734,000
Security Deposit ............................................................. 80,000
Total Assets ................................................................... $ 5,814,000
Liabilities and shareholders' equity
Current liabilities:
Accounts payable & accrued expenses .......................................... $ 76,000
Total liabilities .............................................................. 76,000
Commitments and contingencies
Shareholders' Equity:
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
3,592,024 shares issued (including treasury shares) ...................... 4,000
Capital in excess of par value ............................................... 9,555,000
Accumulated deficit .......................................................... (3,775,000)
Treasury stock, 11,513 shares .................................................. (46,000)
Total shareholders' equity ..................................................... 5,738,000
Total liabilities and shareholders' equity ..................................... $ 5,814,000
See accompanying notes
</TABLE>
<TABLE>
GATEWAY INDUSTRIES, INC
Statements of Operations
<CAPTION>
Year Ended December 31,
1998 1997
<S> <C> <C>
Revenues ....................................................................... $ -- $ --
General and administrative expenses ............................................ 359,000 366,000
Operating loss ................................................................. (359,000) (366,000)
Other income (expense)
Interest ..................................................................... 375,000 297,000
Gain on sale of investment ................................................... 13,000 52,000
Write up (down) of note receivable ........................................... 360,000 (360,000)
Other ........................................................................ -- 38,000
Total other income ............................................................. 748,000 27,000
Net income (loss) ............................................................. $ 389,000 $ (339,000)
Net income (loss) per share-basic and diluted .................................. $ .11 $ (.09)
See accompanying notes.
</TABLE>
<TABLE>
GATEWAY INDUSTRIES, INC.
Statements of Shareholders' Equity
<CAPTION>
Common Stock Excess of (Accumulated Treasury
Shares Amount Par Value Deficit) Stock Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 3,592,024 $ 4,000 $9,555,000 $(3,825,000) $(46,000) $5,688,000
Net loss - - - (339,000) - (339,000)
--------- -------- ---------- ----------- -------- ----------
Balance at
December 31, 1997 3,592,024 4,000 9,555,000 (4,164,000) (46,000) 5,349,000
Net income - - - 389,000 - 389,000
--------- -------- ---------- ----------- -------- ----------
Balance at
December 31, 1998 3,592,024 $ 4,000 $9,555,000 $(3,775,000) $(46,000) $5,738,000
========= ======== ========== =========== ======== ==========
See accompanying notes.
</TABLE>
<TABLE>
GATEWAY INDUSTRIES, INC.
Statements of Cash Flows
<CAPTION>
Year Ended December 31,
1998 1997
<S> <C> <C>
Operating activities
Net income (loss) ...................................... $ 389,000 $ (339,000)
Adjustments to reconcile net Income (loss) to net cash
used in operating activities:
Gain on sale of securities ..................... (13,000) --
Net change in assets and liabilities
Note receivable ....................... (566,000) --
Prepaid and other ...................... (12,000) --
Security deposit ....................... (80,000) --
Accounts payable ....................... (24,000) (273,000)
-------- --------
Net cash used in operating activities .................. (306,000) (612,000)
-------- --------
Cash flows from investing activities:
Purchase of equities available for sale......... (92,000) --
Sale of equities available for sale ............ 105,000 --
--------- ---------
Net cash provided by investing activities ............. 13,000 --
--------- ---------
Net decrease in cash and cash equivalents .............. (293,000) (612,000)
Cash and cash equivalents at beginning of year ......... 5,433,000 6,045,000
--------- ---------
Cash and cash equivalents at end of year ............... $ 5,140,000 $ 5,433,000
========= =========
Supplemental cash flow information:
Income taxes paid during the year .............. $ 800 $ 800
See accompanying notes.
</TABLE>
GATEWAY INDUSTRIES, INC.
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION, BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND BUSINESS ACTIVITIES
Gateway Industries, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on September 24, 1994, and was the successor, by merger,
to Gateway Communications, Inc., a California corporation incorporated on March
6, 1991.
On November 24, 1995, Glass Acquisition Corp., a wholly-owned subsidiary of
Gateway Industries, Inc., acquired substantially all of the assets and business
of Marsel Mirror & Glass Products, Inc. ("Old Marsel") and the related real
estate interest of Barlow Associates from which Old Marsel conducted its
business in Brooklyn, New York. Old Marsel was one of the originators of mass
producing mirrors for consumption across the country. Subsequent to the closing,
Glass Acquisition Corp. changed its name to Marsel Mirror & Glass Products, Inc.
("Marsel").
On December 21, 1996, the Company sold all outstanding shares of its wholly
owned subsidiary, Marsel, to an unrelated third party for $1.00, pursuant to a
Stock Purchase Agreement (the "Agreement"). Under the Agreement, the Company has
the right to purchase 50% of the outstanding shares of Marsel until December 21,
1999 for $2.00. The Company paid $75,000 to Marsel's lender and issued
approximately $300,000 of guarantees on behalf of Marsel which have been fully
satisfied. In addition, the Agreement contains provisions relating to the
allocation between the Company and the unrelated third party of sums from the
sale or liquidation of Marsel or the sale of equity in Marsel by the unrelated
third party, if either occur. The purchase price and terms were determined by
the Company and the unrelated third party following the expiration of Marsel's
credit facility; and, said bank's demand for immediate repayment of all
outstanding balances and Marsel's failure to negotiate a financing agreement
with a new commercial lender; and, the failure of Marsel to obtain an extension
of its letter of credit beyond December 31, 1996. Since the Company has a
contingent 50% interest in Marsel, the above transaction was not accounted for
as a discontinued operation.
On December 23, 1996, Marsel filed for bankruptcy under Chapter 11 of the
Bankruptcy Code.
The Company currently has no operating business. Management is pursing
various strategic alternatives which include the possible use of the Company's
remaining net assets to acquire, merge, or consolidate or otherwise combine with
an operating business or businesses; however, there is no assurance that any
such alternatives will occur.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity date of three months or less and investments in money market accounts
to be cash equivalents. At December 31, 1998, cash and cash equivalents were
held principally at one financial institution.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET INCOME (LOSS) PER SHARE
For 1998, the basic and diluted weighted average number of shares
outstanding are 3,592,024 and 3,593,454, respectively. For 1997, the basic and
diluted weighted average number of shares outstanding was 3,592,024. The effect
of common stock equivalents for 1997 has not been considered as such items are
antidilutive.
RECLASSIFICATION
Certain prior year account balances have been reclassified to conform
with the current year's presentation.
2. INCOME TAXES
Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes" ("FAS 109"), requires the liability approach to accounting for
deferred income taxes for financial reporting purposes. Under the provisions of
FAS 109, deferred tax assets and liabilities are determined based on tax rates
expected to be in effect when the taxes will actually be paid or refunds
received.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1998 are as
follows:
Deferred tax assets:
Reserves $ 11,000
Net operating loss carryforward 3,126,000
Total deferred tax assets 3,137,000
Valuation allowance (3,137,000)
Deferred tax assets, net of valuation allowance $ -
=============
The deferred tax assets were offset by a valuation allowance due to the
uncertainty of realizing the income tax benefits associated with these deferred
tax assets.
At December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $9,145,000 that begin to expire between 2001 and
2012. Utilization of the net operating losses may be subject to annual
limitation due to the ownership change rules provided by Section 382 of the
Internal Revenue Code and similar state provisions.
3. STOCK OPTION PLANS
The Company's Incentive Stock Option Plan and Nonstatutory Stock Option
Plan (collectively, the "Plans"), as amended in December 1995, provides for the
granting of nonqualified and qualified stock options under the Internal Revenue
Code. An aggregate of 400,000 shares of common stock has been reserved for grant
at December 31, 1998. Persons who are not employees of the Company are eligible
to receive only nonqualified stock options. The options may be granted for a
term up to five years. If an incentive stock option is granted to an individual
owning more than 10% of the total combined voting power of all classes of the
Company's stock, the exercise price of the option may not be less than 110% of
the fair market value of the underlying shares on the date of the grant.
Directors who are not employees or officers of the Company are granted
2,000 options upon joining the Company's Board, and 2,000 options on the day of
each annual meeting of shareholders in which such director is elected or
reelected to office. Options due but not issued in the current year will be
issued in 1999.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options.
Pro forma information regarding net income (loss) per share is required by
FASB Statement No. 123, "Accounting for Stock Based Compensation," and has been
determined as if the Company had accounted for its stock options under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1997; risk-free interest rates of
6.19%; volatility factors of the expected market price of the Company's common
stock of 1.13. The weighted-average expected life of the option is 5.3 years.
Dividends are not expected in the future. There were no options granted during
1998.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of high subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Given this
method of amortization, the initial impact of applying SFAS No. 123 on pro forma
net income and pro forma net income per share is not representative of the
potential impact on pro forma amounts in future years, when the effect of the
amortization from multiple awards would be reflected. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
<S> <C> <C>
Pro forma net income (loss) $ 187,775 $(531,000)
Pro forma net income (loss) per share-basic and diluted $ .05 $ (.15)
</TABLE>
Stock option activity is summarized as follows:
Weighted-
Average
Exercise
Shares Price
------ -----
Balance at December 31, 1996 ........... 146,000 3.88
Granted ........................ 102,000 1.82
Canceled ....................... -- --
Options outstanding at December 31, 1997 248,000 $ 2.99
Granted ........................ -- --
Canceled ....................... -- --
------- --------
Options outstanding at December 31, 1998 248,000 $ 2.99
The weighted average fair value of options granted during 1997 was $1.66.
The exercise prices for options outstanding as of December 31, 1998 ranged from
$1.00 to $4.25. The weighted average remaining contractual life of these options
is 4.29 years.
At December 31, 1998, approximately 197,000 options were exercisable. No
options were exercised during the years ended December 31, 1998 and 1997.
4. NOTE RECEIVABLE
In October 1997, the Company signed a letter of intent to acquire Only
Multimedia Network Incorporated ("OMNI"), a privately held company in the
business of providing casting directors with Internet access to text, pictorial
and video information on actors. Pursuant to the letter of intent, the Company
advanced OMNI $450,000 (including $90,000 in 1998), and OMNI issued a secured
promissory note to the Company in the amount of $500,000 originally due at
December 31, 1998. After the letter of intent was signed, OMNI's financial
performance was significantly worse than expected, and the Company reserved as
uncollectible the $360,000 advanced to OMNI as of December 31, 1997. During
1998, the Company and OMNI terminated merger discussions. The Company received
payments of amounts due from OMNI (including the amounts previously reserved) in
March 1999
5. RELATED PARTY TRANSACTIONS
The Company leases offices in New York under a lease expiring March 30,
2001, at an annual cost of approximately $100,000. It sub-leases offices, at
one-third of its cost for the space, to Steel Partners Services, Ltd., an entity
controlled by the Company's chairman, and it also sub-leases offices, at
one-third of its cost for the space, to Rose's Holdings, Inc., a company in
which Steel Partners II, L.P., and the Company's chairman have an approximately
32% beneficial interest.
During the year ended December 31, 1998, the Company paid approximately
$147,000 to a company affiliated with its chairman, for certain general
administrative services.
6. COMMITMENTS
The Company entered into a three-year operating lease for office space
commencing April 1, 1998. Future minimum lease payments under this lease are as
follows:
Deduct Net
Sublease Rental
Year Commitments Rentals Commitments
---- ----------- ------- -----------
1999 97,000 65,000 32,000
2000 97,000 65,000 32,000
2001 24,000 16,000 8,000
------- ------- -------
$218,000 $146,000 $ 72,000
The Company has sublet a portion of its office space to companies
affiliated with its chairman. Rent expense for the year ended December 31, 1998
was $32,412. There was no rent expense for the year ended December 31, 1997.
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<NAME> Gateway Industries, Inc.
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<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
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<CASH> 5,140,000
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