SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] 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 [ ]
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. [X]
Issuer has had no revenues in its most recent fiscal year.
The aggregate market value of voting stock held by non-affiliates of the Issuer
at March 31, 2000 was approximately $8,749,420 based on the average high/low
ask/bid price of $3.6875 for such stock on that date.
As of March 31, 2000, the Registrant had 4,192,024 shares of common stock, $.001
par value per share, outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement to be used in connection
with its Annual Meeting of Stockholders to be held on June 30, 2000, are
incorporated by reference into Part III of this report.
<PAGE>
Gateway Industries, Inc.
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Description of Business. 2
Item 2. Description of Property. 4
Item 3. Legal Proceedings. 5
Item 4. Submission of Matters to a Vote of Security Holders. 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters. 6
Item 6. Management's Discussion and Analysis
or Plan of Operation. 7
Item 7. Financial Statements 8
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure. 8
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons;Compliance With Section 16(a)
of the Exchange Act. 9
Item 10. Executive Compensation 9
Item 11. Security Ownership of Certain Beneficial
Owners and Managers 9
Item 12. Certain Relationships and Related Transactions. 9
Item 13. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
PART I
ITEM 1. Description of Business
OVERVIEW
Gateway Industries, Inc. (the "Company") was incorporated in Delaware in
July 1994. The Company had no operating business from December 1996 to March
2000, when it acquired all of the outstanding common stock of Oaktree Systems
Inc. ("Oaktree"). Oaktree provides database development, consolidation and
management services, and web site design and maintenance to customers throughout
the United States: such customers are principally not-for-profit entities,
health care providers and publishers. See the description of Oaktree below.
The Company had no full time employees from December 1996 until the
acquisition of Oaktree in March 2000. The Company's Chairman, Acting President
and Steel Partners Services, Ltd. (an entity controlled by the Company's
Chairman) devote time to the Company's administration and in exploring potential
acquisitions and other business opportunities.
OAKTREE
The Company acquired Oaktree on March 21, 2000 pursuant to a Stock Purchase
Agreement. The purchase price of Oaktree was approximately $3.6 million,
consisting of $2 million in cash, the issuance of 600,000 restricted shares of
common stock of the Company and the assumption of approximately $650,000 of
debt, which was repaid at the closing date, plus certain fees and expenses.
Oaktree provides database development, consolidation and management
services, web site design and maintenance, and other miscellaneous services to
customers throughout the United States. Oaktree's customers are predominantly
not-for-profit organizations, healthcare providers, and publishers.
Oaktree had revenues of approximately $3.0 million in 1999 and was
profitable. Operating income in 1999 was adversely impacted by expenses related
to Year 2000 preparedness, unusually large software and system upgrades and web
design development projects which are not expected to recur annually to the
extent incurred in 1999. The Company believes that these expenditures will
enable Oaktree to significantly enhance the services provided to its customers.
The Company's growth strategy regarding Oaktree is to (a) cross-sell
services with MDM Technologies Inc., an entity controlled by Warren G.
Lichtenstein, who is the sole managing member of Steel Partners L.L.C., the
General Partner of Steel Partners II, L.P, which together with Mr. Lichtenstein
has a 30% beneficial interest in the Company, (see "Item 12, Certain
Relationships and Related Transactions."), and (b) explore acquisitions of
related established products and service providers that will provide
opportunities to offer Oaktree's customers an integrated, full-service product
offering.
The Company's ability to make further product acquisitions will depend,
among other things, on the availability of appropriate acquisition
opportunities, the ability to obtain appropriate financing and the Company's
ability to consummate acquisitions on acceptable terms. There can be no
assurance that the Company will be able to consummate any such acquisition on
acceptable terms.
COMPETITION
Oaktree competes in a highly fragmented industry with many national and
local competitors. Competition comes from many sources including database
development companies, service bureaus, and mailhouses. Many of the competitors
of Oaktree possess substantially greater financial, technical, marketing and
other resources than we do.
PROPERTY
Oaktree leases 2,500 square feet of office space in Calverton, New York.
The lease expires on February 1, 2003. The space is rented from a partnership in
which two of the senior managers of Oaktree each own a material interest. Rent
expense, including Oaktree's share of real estate taxes, was approximately
$224,000 and $228,000 in 1999 and 1998, respectively.
During 1999, Oaktree entered into a lease for 806 square feet in St. Paul,
Minnesota. Rent expense is $962 per month. The lease expires on Dec 31, 2000.
PATENTS AND TRADEMARKS
Oaktree does not have any patents or trademarks.
HUMAN RESOURCES
As of March 25, 2000, Oaktree employed 50 full time employees. None of the
employees are subject to any collective bargaining agreements and we believe
that our relationship with our employees is good.
ONLY MULTIMEDIA NETWORK, INCORPORATED
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 a letter of intent, the Company
advanced $450,000 ($90,000 in 1998 and $360,000 in 1997) to OMNI, and OMNI
issued a $500,000 secured promissory note.
OMNI's financial performance was less 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, renegotiated
the promissory note and OMNI issued 50,000 restricted shares of its stock to the
Company. 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.
MARSEL MIRROR AND GLASS PRODUCTS, INC.
On November 24, 1995, Glass Acquisition Corp., a wholly owned subsidiary of
the Company, 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. 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 Marsel to
an unrelated third party for $1.00 per share, pursuant to a Stock Purchase
Agreement (the "Agreement"). Under the Agreement, the Company had the right to
purchase 50% of the outstanding shares of Marsel for $2.00 per share until
December 21, 1999. Pursuant to the Agreement, the Company paid $75,000 to
Marsel's lender and issued approximately $300,000 of guarantees to vendors of
Marsel, all of which were fully satisfied by December 31, 1998. In addition, the
Agreement contains provisions relating to the allocation between the Company and
the unrelated third party of the proceeds from the sale or liquidation of Marsel
or the sale of equity in Marsel by the unrelated third party, if either occurs.
The purchase price and terms were determined by the Company and the unrelated
third party following (a) the expiration of Marsel's credit facility, (b) the
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 (c)
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. During 1999, the Company received, pursuant to a court approved
settlement of all amounts due from Marcel, $21,000, net of $79,000 of expenses.
During 1999, the Company also exercised its option to acquire 50% of the
outstanding stock of Marsel. The exercise of this option has not been approved
by the bankruptcy court, and the creditors' committee of Marsel has put forth
other proposals. It is uncertain as to whether the exercise of the option will
be approved and consummated. Although Marsel has current business operations,
there is significant uncertainty as to the value of the stock of Marsel.
Accordingly, the Company has not assigned any value to its holdings of Marsel.
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. It subleased
office space, at one-third of its cost for the space, to each of (a) Steel
Partners Services, Ltd. ("SPS"), an entity controlled by the Company's Chairman,
and (b) WebFinancial Corporation, a public company in which Steel Partners II,
L.P., an entity controlled by the Company's Chairman, and the Company's Chairman
have an approximate 30% beneficial interest. As of January 1, 1999, the rent on
the office space is paid by SPS and the Company pays a management fee of
$275,000, which includes its one third share of rent expense, to SPS. (See "Item
12, Certain Relationships and Related Transactions.")
<PAGE>
ITEM 3. Legal Proceedings.
There are no material pending legal proceedings against the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.
MARKET FOR COMMON STOCK
Since November 17, 1994, the Company's Common Stock has been traded
over-the-counter using the symbol "GWAY" on what is commonly referred to as the
"Bulletin Board." The following table sets forth the high and low bid prices
during each quarter of its last two fiscal years, and during the first quarter
of 2000 through March 31, 2000, as quoted on the Bulletin Board. These prices
represent quotations between broker-dealers, do not include retail markups and
markdowns, or any commissions, and may not reflect prices in actual
transactions.
CLOSING BID PRICES
HIGH($) LOW($)
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 1.6250 1.5000
THIRD QUARTER 2.0000 1.5000
FOURTH QUARTER 1.8750 1.8750
2000
- ----
FIRST QUARTER March 31, 2000 3.6875 2.9375
HOLDERS OF RECORD
At March 7, 2000, there were approximately 1,398 holders of the Company's
common stock.
DIVIDENDS
The Company has not paid any dividends on its Common Stock for the last two
Fiscal years and does not anticipate doing so in the foreseeable future.
<PAGE>
ITEM 6. Management's Discussion and Analysis or Plan of Operations
PLAN OF OPERATIONS
On March 21, 2000, the Company acquired Oaktree. Oaktree provides database
development, consolidation and management services, web site design and
maintenance, and other services to customers throughout the United States.
Oaktree's customers are predominantly not-for-profit organizations, healthcare
providers, and publishers.
Oaktree had revenues of approximately $3.0 million in 1999 and was
marginally profitable. Oaktree's operating income in 1999 was adversely impacted
by expenses related to Year 2000 preparedness, unusually large software and
system upgrades, and web design development projects which are not expected to
recur annually to the extent incurred in 1999. The Company believes that these
expenditures will enable Oaktree to significantly enhance its services provided
to its customers.
The purchase price of Oaktree consisted of $2 million in cash, the issuance
of 600,000 restricted shares of common stock of the Company, the assumption of
approximately $650,000 of debt which was repaid in full at closing and certain
fees and expenses.
Assuming no other acquisitions are completed in 2000, Oaktree will be the
Company's only operations.
Although the Company has not identified any other acquisition candidates,
management is considering various strategic alternatives relating to additional
acquisitions. There can be no assurance, however, that any such transaction will
be consummated.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company had no revenues for the years ended December 31, 1999 and 1998.
Expenses for 1999 and 1998 were $654,000 and $359,000, respectively. Increased
expenses are principally attributable to compensation expense of options granted
to non-employee consultants, legal fees and general and administrative expenses.
During the year ended December 31, 1999, the Company recognized $272,000 of
other income which was primarily interest income. For the year ended December
31, 1998, the Company recognized other income of $748,000, consisting of
interest income of $375,000, gain of $13,000 and a $360,000 reversal of an
allowance for uncollectibility which had been recorded in the prior year. The
larger amount of 1998 interest income resulted from interest paid on the OMNI
debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $5,465,000 at December 31,
1999, compared with $5,140,000 at December 31, 1998. $2,000,000 was expended in
March 2000 for the Oaktree acquisition. The increase was primarily generated by
the collection of the Company's receivable of the OMNI debt and related
interest. See "Item 1. Description of Business." Aside from the lease
commitments, the Company has no significant capital commitments at this time.
Based on the Company's cash position management anticipates that the Company's
current cash flows are adequate to meet its liquidity needs for the next twelve
months.
<PAGE>
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
On June 22, 1999, Gateway Industries, Inc. (the "Company") was informed by
Ernst & Young LLP, that it had resigned as the Company's auditors. Ernst &
Young's reports on the financial statements for the past two years have not
contained any adverse opinion or disclaimer of opinion, nor was any opinion
qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the Company's consolidated financial
statements for each of the two fiscal years ended December 31, 1998 and 1997,
and in the interim period subsequent to December 31, 1998, preceding the date of
Ernst & Young's resignation, there were no "disagreements," as that term is
defined in the instructions to Form 8-K and the regulations applicable to Item 4
of Form 8-K, with Ernst & Young on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which
"disagreement", if not resolved to the satisfaction of Ernst & Young, would have
caused Ernst & Young to make reference to the subject matter of the
"disagreement" in their report.
On June 29, 1999, the Board of Directors of the Company engaged Grant
Thornton LLP as the Company's auditors. The Company has not consulted with Grant
Thornton LLP during the past two fiscal years concerning the application of
accounting principles or any issues relating to accounting, auditing or
financial reporting.
A letter from Ernst & Young concerning the disclosures made in Item 4 of
the Report on Form 8-K is annexed hereto as Exhibit 99.1.
<PAGE>
PART III
ITEM 9. Directors and Executive Officers
The information required by this item will be included under the captions
"ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" of the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year covered by this report and
is incorporated herein by reference.
ITEM 10. Executive Compensation
The information required by this item will be included under the caption
"EXECUTIVE COMPENSATION" in the Company's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year covered by this report and is incorporated herein by
reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be included under the captions
"PRINCIPAL STOCKHOLDERS" and "Beneficial Ownership of Directors and Management"
in the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal year
covered by this report and is incorporated herein by reference.
ITEM 12. Certain Relationships and Related Transactions
The information required by this Item is will be included under the caption
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year covered by this report and
is incorporated herein by reference.
<PAGE>
ITEM 13. Exhibits, Lists and Reports on Form 8-K
(a) Exhibits
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. (b)
10.11 Stock Purchase Agreement, dated December 21, 1996, between Gateway
Industries, Inc. and Richard A. Hickland. (c)
16.1 Report on form 8-K dated June 29, 1999 reporting the termination of the
Company's relationship with the audit firm of Ernst & Young, LL P.(d)
16.2 Report on form 8-K dated June 29, 1999 as amended.(d)
27 Financial Data Schedule.
99.1 Letter dated July 21, 1999 from Ernst & Young LLP to the Securities and
Exchange Commission. (e)
- ---------------
(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-QSB for the quarter ended June
30, 1989, and incorporated herein by reference.
(c) Filed as an exhibit to the Company's Form 8-K filed on or about January 5,
1997,and incorporated herein by reference.
(d) Filed as an exhibit to the Company's 10-KSB filed on or about March 31,
1999, and incorporated herein by reference.
(e) Filed as an exhibit to the Company's Form 8-K/A filed on July 29, 1999, and
incorporated herein by reference.
(b) Reports on form 8-K
The Company filed the following current report on Form 8-K during the last
quarter covered by this report:
(i) Report on Form 8-K filed on or about March 31, 2000 reporting the
stock purchase agreement with Oaktree.
<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: April 13, 2000
By:/s/ Jack L. Howard
Jack L. Howard,
Acting President
Principal Executive Officer
Date: April 13, 2000
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: April 13, 2000
By:/s/ Jack L. Howard
Jack L. Howard
Director
Date: April 13, 2000
By:/s/ Warren G. Lichtenstein
Warren G. Lichtenstein
Director
Date: April 13, 2000
By:/s/ Ronald W. Hayes
Ronald W. Hayes
Director
<PAGE>
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. (b)
10.11 Stock Purchase Agreement, dated December 21, 1996, between Gateway
Industries, Inc. and Richard A. Hickland. (c)
16.1 Report on form 8-K dated June 29, 1999 reporting the termination of
the Company's relationship with the audit firm of Ernst & Young,
LLP.(d)
16.2 Report on Form 8-K dated June 29, 1999 as amended.(d)
16.3 Report on form 8-K dated March 31, 2000 reporting the Company's
acquisition of Oaktree.(e)
27 Financial Data Schedule.
99.1 Letter dated July 21, 1999 from Ernst & Young LLP to the Securities
and Exchange Commission. (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-QSB for the quarter ended June
30, 1989, and incorporated herein by reference.
(c) Filed as an exhibit to the Company's Form 8-K filed on or about January 5,
1997, and incorporated herein by reference.
(d) Filed as an exhibit to the Company's 10-KSB filed on or about March 31,
1999, and incorporated herein by reference.
(e) Filed as an exhibit to the Company's 10-KSB filed on or about April 12,
2000 and incorporated herein by reference.
(f) Filed as an exhibit to the Company's Form 8-K/A filed on July 29, 1999, and
incorporated herein by reference.
<PAGE>
Gateway Industries, Inc.
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
Reports of Independent Certified Public Accountants
and Independent Auditors F-2
Financial Statements
Balance Sheets as of December 31, 1999 and 1998 F-4
Statements of Operations for the Years Ended
December 31, 1999 and 1998 F-5
Statement of Shareholders' Equity for the Years Ended
December 31, 1999 and 1998 F-6
Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 F-7
Notes to Financial Statements F-8 - F-15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Gateway Industries, Inc.
We have audited the accompanying balance sheet of Gateway Industries, Inc. as of
December 31, 1999 and the related statements of operations, shareholders'
equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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, 1999 and the results of its operations and its cash flows for the
year ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/GRANT THORNTON LLP
New York, New York
February 28, 2000
<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 the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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 the
year then ended in conformity with accounting principles generally accepted in
the United States.
/s/Ernst & Young LLP
Los Angeles, California
April 6, 1999
<PAGE>
Gateway Industries, Inc.
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents.......................... $ 5,465,000 $ 5,140,000
Note receivable.................................... -- 566,000
Prepaid expenses and other......................... 10,000 28,000
------------ ------------
Total current assets............................ 5,475,000 5,734,000
Prepaid acquisition costs............................ 24,000 --
Security deposit..................................... 60,000 80,000
------------ ------------
Total assets.................................... $ 5,559,000 $ 5,814,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses.............. $ 75,000 $ 76,000
------------ ------------
Total current liabilities....................... 75,000 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
and outstanding at December 31, 1999 and 1998.... 4,000 4,000
Capital in excess of par value..................... 9,683,000 9,555,000
Accumulated deficit (4,157,000) (3,775,000)
Treasury stock, 11,513 shares of common stock,
at cost.......................................... (46,000) (46,000)
------------ ------------
Total shareholders' equity...................... 5,484,000 5,738,000
------------ ------------
Total liabilities and shareholders' equity...... $ 5,559,000 $ 5,814,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
GATEWAY INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Revenues............................................ $ -- $ --
General and administrative expenses................. 654,000 359,000
----------- -----------
Operating loss...................................... (654,000) (359,000)
----------- -----------
Other income
Interest.......................................... 251,000 375,000
Gain on sale of investment........................ -- 13,000
Reversal of reserve for uncollectible
note receivable - OMNI.......................... -- 360,000
Net settlement of unsecured claims - Marsel....... 21,000 --
----------- -----------
Total other income.............................. 272,000 748,000
----------- -----------
Net income (loss)................................... $ (382,000) $ 389,000
=========== ===========
Net income (loss) per share
- basic and diluted............................... $ (.11) $ .11
=========== ===========
Weighted average shares outstanding used
in computing basic and diluted
net income (loss) per share....................... 3,592,024 3,592,000
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Gateway Industries, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Capital in
Common stock excess of Accumulated Treasury
Shares Amount par value deficit stock Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
Compensation charge for options
granted to consultants 128,000 128,000
Net loss (382,000) (382,000)
---------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 3,592,024 $ 4,000 $ 9,683,000 $(4,157,000) $ (46,000) $ 5,484,000
========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
Gateway Industries, Inc.
STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ (382,000) $ 389,000
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Gain on sale of securities...................... -- (13,000)
Compensation charge for options
granted to consultants........................ 128,000 --
Reversal of reserve for uncollectible
note receivable............................... -- (360,000)
Net changes in assets and liabilities:
Prepaid expense and other................... 18,000 (13,000)
Securiy deposit............................. 20,000 (80,000)
Accounts payable and accrued expenses....... (1,000) (24,000)
----------- -----------
Net cash used in operating activities........... (217,000) (101,000)
----------- -----------
Cash flows from investing activities:
Collection of note receivable - OMNI................ 566,000 (206,000)
Prepaid acquisition costs - Oaktree................. (24,000) --
Purchase of equities available for sale............. -- (92,000)
Sale of equities available for sale................. -- 106,000
----------- -----------
Net cash provided by (used in)
investing activities.......................... 542,000 (192,000)
----------- -----------
Net increase (decrease) in cash and
cash equivalents.............................. 325,000 (293,000)
Cash and cash equivalents at beginning of year........ 5,140,000 5,433,000
----------- -----------
Cash and cash equivalents at end of year.............. $ 5,465,000 $ 5,140,000
=========== ===========
Supplemental cash flow information:
Cash paid during the year for income taxes.......... $ 1,000 $ 800
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Gateway Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - ORGANIZATION, BUSINESS ACTIVITIES AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
1. 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.
The Company had no operating business at December 31, 1999. Management has been
pursuing 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; and in March 2000 acquired
Oaktree Systems, Inc. (See Note G.)
2. Marsel Mirror & Glass Products, Inc. Transaction
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
production of 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 had the right to purchase 50% of the outstanding shares of Marsel until
December 21, 1999 for $2.00. Pursuant to the Agreement, the Company paid $75,000
to Marsel's lender and issued approximately $300,000 of guarantees to vendors of
Marsel, all of which were fully satisfied by December 31, 1998. In addition, the
Agreement contains provisions relating to the allocation between the Company and
the unrelated third party of the proceeds from the sale or liquidation of Marsel
or the sale of equity in Marsel by the unrelated third party, if either occurs.
The purchase price and terms were determined by the Company and the unrelated
third party following the (a) expiration of Marsel's credit facility; (b) bank's
demand for immediate repayment of all outstanding balances (c) Marsel's failure
to negotiate a financing agreement with a new commercial lender; and, (d) the
failure of Marsel to obtain an extension of its letter of credit beyond December
31, 1996.
<PAGE>
Gateway Industries, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE A (continued)
On December 23, 1996, Marsel filed for bankruptcy under Chapter 11 of the
Bankruptcy Code. During 1999, the Company received $21,000, net of $79,000 of
expenses, in complete and court- approved settlement of all amounts due from
Marsel. During 1999, the Company also exercised its option to acquire 50% of the
outstanding stock of Marsel. This option has not been approved by the bankruptcy
court, and the creditors' committee of Marsel has put forth other proposals. It
is uncertain as to whether the option will be approved and consummated. Although
Marsel has current business operations, there is significant uncertainty as to
the value of the stock of Marsel. Accordingly, the Company has not assigned any
value to its holdings of Marsel.
3. 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, 1999 and 1998, cash and cash equivalents
were held principally at one financial institution.
4. 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.
5. Net Income (Loss) Per Share
For 1999 and 1998, the basic and diluted weighted-average number of shares
outstanding was 3,592,024. The effect of common stock equivalents for 1999 and
1998 has not been considered as such items are antidilutive or not material.
6. Income Taxes
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," requires the liability
approach to accounting for deferred income taxes for financial reporting
purposes. Under the provisions of SFAS No. 109, deferred tax assets and
liabilities are determined based on tax rates expected to be in effect when the
taxes are actually paid or refunds received.
<PAGE>
Gateway Industries, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE A (continued)
7. Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options.
8. Reclassification
Certain prior year account balances have been reclassified to conform with the
current year's presentation.
NOTE B - INCOME TAXES
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 are as follows:
1998 1999
---------- ----------
Deferred tax assets
Reserves................................... $ 11,000 $ 11,000
Compensation charge for options issued
to non-employees......................... -- 44,000
Net operating loss carryforward............ 3,126,000 3,236,000
---------- ----------
Total deferred tax assets.............. 3,137,000 3,291,000
Valuation allowance............................ (3,137,000) (3,291,000)
---------- ----------
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.
<PAGE>
Gateway Industries, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE B (continued)
At December 31, 1999, the Company has Federal net operating loss carryforwards
of approximately $9,400,000 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.
NOTE C - STOCK OPTION PLANS
The Company's Incentive Stock Option Plan and Nonstatutory Stock Option Plan
(collectively, the "Plans"), as amended in December 1995, provide 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 and 1999. Persons who are not employees of the Company are
eligible to receive only nonqualified stock options. The options may be granted
for a term of 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.
Pro forma information regarding net income (loss) per share is required by FASB
Statement of Financial Accounting Standards No. 123 ("SFAS 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 1999 risk-free interest rates of 6.19%; volatility factors of
the expected market price of the Company's common stock of 113%. 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 highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different
<PAGE>
Gateway Industries, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE C (continued)
from those of 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:
Year ended December 31,
1999 1998
---------- ----------
Pro forma net income (loss) $ (596,000) $ 188,000
Pro forma net income (loss) per
share - basic and diluted $ (.17) $ .05
Employee stock option activity is summarized as follows:
Weighted-
average
exercise
Shares price
---------- ----------
Options outstanding at December 31, 1998
and 1997 248,000 $ 2.99
Granted 95,500 2.26
Options outstanding at December 31, 1999 343,500 $ 2.98
==========
The weighted-average fair value of employee options granted during 1999 was
$1.66 The exercise prices for employee options outstanding as of December 31,
1999 ranged from $ 2.00 to 3.63. The weighted- average remaining contractual
life of these options is 4.7 years.
<PAGE>
Gateway Industries, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE C (continued)
At December 31, 1999, approximately 293,000 employee options were exercisable
with a weighted-average price of approximately $2.75 per share. No options were
exercised or cancelled during the years ended December 31, 1999 and 1998.
During 1999, the Company issued options to acquire 78,000 shares at $2.00 per
share to consultants of the Company. Such options vest in three equal
installments, 1/3 immediately and 1/3 each on the subsequent annual anniversary.
The Company recorded $ 128,000 of compensation expense relating to such options
during 1999.
NOTE D - NOTE RECEIVABLE
In October 1997, the Company signed a letter of intent to acquire 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,
accordingly, the Company reserved as uncollectible the $360,000 advanced to OMNI
as of December 31, 1997. OMNI defaulted on the promissory note during 1998. The
Company and OMNI renegotiated the promissory note and also received 50,000
shares of restricted stock of OMNI. The Company reversed the reserve against its
note receivable during 1998. The Company received payments of amounts due from
OMNI of $566,000 including aggregate interest in March 1999. Since the Company
is uncertain as to the value of its holdings in the restricted stock, no amounts
have been recorded.
NOTE E - RELATED PARTY TRANSACTIONS
The Company occupies offices at 150 East 52nd Street, New York, New York 10022,
under a lease agreement extending through March 30, 2001. It subleased office
space, at one-third of its cost for the space, to each of (a) Steel Partners
Services, Ltd., an entity controlled by the Company's Chairman, and (b)
WebFinancial Corporation ("WEFN"), a public company in which Steel Partners II,
L.P. ("SPS"), an entity controlled by the Company's Chairman, and the Company's
Chairman have an approximately 30% beneficial interest. Mr. Howard is also a
director of WEFN. As of January 1, 1999, the rent on the office space is paid by
SPS and the Company pays a management fee to SPS.
<PAGE>
Gateway Industries, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE E (continued)
During the year ended December 31, 1998, the Company paid approximately $147,000
to SPS, for certain general administrative services. For the year ended December
31,1999, the Company paid a $275,000 management fee to that company which
included its one-third share of rent expense. (See Note F).
NOTE F - COMMITMENTS
The Company entered into a three-year operating lease for office space
commencing April 1, 1998. During 1999, the rent was paid by Steel Partners
Services, Ltd. ("SPS") and the Company paid a management fee to SPS (See Note
E). Future minimum lease payments under this lease are as follows:
Deduct Net
sublease rental
Commitments rentals commitments
----------- ----------- -----------
2000 $ 97,000 65,000 $ 32,000
2001 24,000 16,000 8,000
----------- ----------- -----------
$ 121,000 $ 81,000 $ 40,000
The Company has sublet a portion of its office space to companies affiliated
with its Chairman. Rent expense for the year ended December 31, 1999 was
$32,000.
<PAGE>
Gateway Industries, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE G - SUBSEQUENT EVENT (unaudited)
On March 21, 2000, the Company acquired all of the outstanding common stock of
Oaktree Systems, Inc. ("Oaktree"). Oaktree provides database management services
and web site design and maintenance for numerous national not-for-profit,
healthcare and publishing entities. The purchase price consisted of $2 million
in cash paid at closing and the issuance of 600,000 shares of common stock of
the Company with a negotiated value of $1.30 per share and the assumption of
approximately $650,000 of debt, which was repaid in full at the closing date.
Oaktree had revenues of approximately $3 million in 1999 and was marginally
profitable. Assets and liabilities acquired are summarized as follows
(unaudited):
Current assets $ 700,000
Other assets 325,000
----------
$1,025,000
==========
Current liabilities other than
bank debt $ (325,000)
Bank debt (650,000)
----------
$ (975,000)
==========
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000725876
<NAME> Gateway Industries, Inc.
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,465
<SECURITIES> 0
<RECEIVABLES> 10
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,499
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,559
<CURRENT-LIABILITIES> 75
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 5,480
<TOTAL-LIABILITY-AND-EQUITY> 5,559
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 654
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (382)
<INCOME-TAX> 0
<INCOME-CONTINUING> (382)
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<CHANGES> 0
<NET-INCOME> (382)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
