U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or
15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000.
[ ] Transition report under Section 13 or
15(d) of the Securities 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 (IRS Employer
Incorporation or Organization) Identification No.)
150 East 52nd Street, 21st Floor
New York, NY 10022
(Address of Principal Executive Offices)
877-431-2942
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
Yes [X] No [ ]
Shares of Issuer's Common Stock Outstanding at September 30, 2000: 4,192,024
Transitional small business disclosure format: Yes [ ] No [X]
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet
September 30, 2000............................................ 2
Condensed Consolidated Statements
of Operations - Three Months Ended
September 30, 2000 and 1999 .................................. 3
Condensed Consolidated Statements
of Operations - Nine Months Ended
September 30, 2000 and 1999 .................................. 4
Condensed Consolidated Statements
of Cash Flows - Nine Months Ended
September 30, 2000 and 1999................................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis
or Plan of Operations......................................... 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 10
Signatures.................................................................. 11
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents............................................. $ 3,064,000
Accounts receivable................................................... 767,000
Prepaid expenses and other............................................ 32,000
------------
Total current assets.............................................. 3,863,000
------------
Other assets:
Security deposits..................................................... 48,000
Property, plant and equipment, net.................................... 334,000
Goodwill and other intangibles, net................................... 3,337,000
------------
Total other assets................................................ 3,719,000
------------
Total assets ............................................................. $ 7,582,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses................................. $ 265,000
Deferred income....................................................... 268,000
Customer deposits..................................................... 560,000
Capital lease obligation.............................................. 3,000
-------------
Total current liabilities......................................... 1,096,000
-------------
Shareholders' equity
Preferred stock, $.10 par value, 1,000,000 shares authorized,
no shares issued or outstanding................................... --
Common stock, $.001 par value, 10,000,000 shares authorized,
4,192,024 shares issued (including treasury shares)............... 4,000
Capital in excess of par value........................................ 11,051,000
Accumulated deficit................................................... (4,523,000)
Treasury stock, 11,513 shares of common stock-at cost................. (46,000)
-------------
Total shareholders' equity........................................ 6,486,000
-------------
Total liabilities and shareholders' equity................................. $ 7,582,000
=============
</TABLE>
See accompanying notes.
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Sales...................................................................... $ 936,000 --
Cost of sales ............................................................. 133,000 --
------------ ------------
Gross profit ............................................................. 803,000 --
Costs and expenses:
Payroll expenses...................................................... $ 498,000 --
General and administrative............................................ 225,000 $ 108,000
Depreciation and amortization......................................... 144,000 --
Professional fees..................................................... 35,000 --
Occupancy............................................................. 33,000 --
------------ ------------
Total costs and expenses.......................................... 935,000 108,000
------------ ------------
Operating loss........................................................ (132,000) (108,000)
Other income:
Interest income................................................... 42,000 58,000
------------ ------------
Net loss................................................................... $ (90,000) $ (50,000)
============ ============
Net loss per share - basic and diluted..................................... $ (.02) $ (.01)
Weighted average number of shares - basic and diluted...................... 4,192,024 3,592,024
</TABLE>
See accompanying notes.
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Sales...................................................................... $ 1,899,000 --
Cost of sales ............................................................. 320,000 --
------------ ------------
Gross profit ............................................................. 1,579,000 --
Costs and expenses:
Payroll expenses...................................................... $ 1,032,000 --
General and administrative............................................ 643,000 $ 309,000
Depreciation and amortization......................................... 224,000 --
Professional fees..................................................... 154,000 --
Occupancy............................................................. 61,000 --
------------ ------------
Total costs and expenses.......................................... 2,114,000 309,000
------------ ------------
Operating loss........................................................ (535,000) $ (309,000)
Other income:
Interest income................................................... 150,000 169,000
Other income...................................................... 19,000 15,000
------------ ------------
Total other income................................................ 169,000 184,000
------------ ------------
Net loss................................................................... $ (366,000) $ (125,000)
============ ============
Net loss per share - basic and diluted..................................... $ (.09) $ (.03)
Weighted average number of shares - basic and diluted...................... 4,014,652 3,592,024
</TABLE>
See accompanying notes.
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................................. $ (366,000) $ (125,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation .......................................................... 70,000 --
Amortization of goodwill and other intangibles ........................ 154,000 --
Changes in assets and liabilities net of assets and liabilities acquired:
Accounts receivable ............................................... (391,000) --
Prepaid expenses and other ........................................ 77,000 11,000
Security deposit .................................................. 25,000 --
Accounts payable .................................................. (1,000) (32,000)
Deferred income ................................................... 268,000 --
Customer deposits ................................................. 560,000 --
----------- ------------
Net cash provided by (used in) operating activities .......... 396,000 (146,000)
Cash flows from investing activities:
Purchase of property, plant, and equipment ........................ (85,000) --
Purchase of Oaktree Systems Inc., net of cash acquired ............ (2,693,000) --
Note receivable ................................................... -- 566,000
------------ ------------
Net cash (used in) provided by investing activities .......... (2,778,000) 566,000
Cash flows from financing activities:
Payments of obligation on capital lease ........................... (19,000) --
------------ ------------
Net cash used in financing activities ................................. (19,000) --
------------ ------------
Net (decrease) increase in cash and cash equivalents .................. (2,401,000) 420,000
Cash and cash equivalents at beginning of period ...................... 5,465,000 5,140,000
------------ ------------
Cash and cash equivalents at end of period ............................ $ 3,064,000 $ 5,560,000
============ ============
</TABLE>
Supplemental information:
On March 21, 2000, the Company acquired 100% of the common stock of Oaktree
Systems, Inc. for $4,078,000 which included the issuance of 600,000 shares of
common stock of Gateway Industries, Inc. (see Note 3).
See accompanying notes.
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
1. General
The accompanying unaudited condensed 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 financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to make such financial statements not misleading.
Results for the three and nine months ended September 30, 2000, are not
necessarily indicative of the results that may be expected either for any other
quarter in the year ending December 31, 2000, or for the entire year ending
December 31, 2000. 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, 1999.
2. Operations
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. Such
customers are principally not-for-profit entities, health care providers and
publishers throughout the United States.
The Company had no full time employees from December 1996 until the
acquisition of Oaktree in March 2000. The Company's officers 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.
3. Purchase of Subsidiary
In March 2000 the Company acquired 100% of the outstanding stock of Oaktree
for a purchase price of $4,078,000, consisting of $2,000,000 in cash, the
issuance of 600,000 shares of common stock of the Company, the repayment of
existing Oaktree bank debt of $640,000 and expenses of $70,000. The acquisition
was accounted for as a purchase, and, accordingly include the results of
operations since the date of acquisition. The excess of purchase price over the
fair value of net assets acquired was recorded as goodwill of $3,124,000 and
other intangible assets of $350,000 which will be amortized over 15 and 5 years,
respectively.
The following consolidated condensed unaudited proforma statement of
operations, as if the Oaktree acquisition had occurred at January 1, 1999.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Sales $ 936,000 $ 728,000 $ 2,557,000 $2,055,000
Cost of expenses 1,068,000 895,000 3,280,000 2,472,000
Other income 42,000 59,000 171,000 197,000
----------- ----------- ----------- -----------
Net loss $ (90,000) $ (108,000) $ (552,000) $ (220,000)
=========== =========== =========== ===========
Net loss per share
--basic and diluted $ (.02) $ (.03) $ (.13) $ (.05)
</TABLE>
Assets acquired and liabilities acquired at estimated fair value at March 21,
2000 are as follows:
<TABLE>
<S> <C>
Cash $ 8,000
Accounts receivable 376,000
Other current assets 99,000
Fixed assets, net 320,000
Security deposits 13,000
Accounts payable and accrued expense (191,000)
Capital leases (22,000)
----------
Total tangible net assets $ 603,000
===========
</TABLE>
4. Significant Accounting Policies
Revenue Recognition:
Revenues are recognized upon delivery of services. Billings on contracts
which extend beyond one month are deferred and then recognized as earned.
Customer deposits are used to pay for printing and materials for customer
mailings. The Company receives these deposits and then makes payments as
directed by the customer for printing and materials as a service only.
5. Lease Commitments
The Company entered into a three-year operating lease for office space in
New York, NY which began April 1, 1998. The Company has sublet a portion of its
office space to affiliated companies.
Oaktree leases 9,008 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.
Oaktree has a lease for 1,650 square feet in St. Paul, Minnesota which expires
on Dec 31, 2000.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
Deduct Net
Sublease Rental
Commitments Rentals Commitments
<S> <C> <C> <C>
2000 57,000 17,000 40,000
2001 126,000 16,000 110,000
2002 105,000 -- 105,000
------- -------- --------
$288,000 $ 33,000 $255,000
======== ======== ========
</TABLE>
6. Net Loss Per Share
Net loss per share was calculated using the weighted average number of
common shares outstanding. The effect of all common stock equivalents is not
included in the per share computation for the three and nine months ended
September 30, 2000 and 1999, as such items are anti-dilutive in these quarters.
Accordingly, basic and diluted income per share are the same for the three and
nine months ended September 30, 2000 and 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Company acquired Oaktree on March 21, 2000, for a purchase price of
approximately $4.1 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 $640,000 of debt (which was repaid in full at closing), and
certain fees and expenses.
Oaktree had revenues of approximately $3.0 million in 1999 and was
marginally profitable. Oaktree's 1999 operating income 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 intends to continue to enhance Oaktree's internal growth
opportunities and efforts, and explore acquisitions of established products and
service providers that will provide opportunities to present customers to an
integrated, full-service product offering.
The Company's ability to make further product acquisitions will depend on,
among other things, 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.
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 Oaktree.
As of September 30, 2000, Oaktree employed 64 full time and part time
employees. None of the employees are subject to any collective bargaining
agreements and the Company believes that the relationship with its employees is
good.
REVENUES AND EXPENSES
The Company had no operating business from 1996 until the acquisition of
Oaktree in March 2000.
During the three month period ended September 30, 2000, Oaktree had
revenues of $936,000, cost of sales of $133,000 and a gross profit of $803,000.
Gateway's consolidated costs and expenses for the three month period ended
September 30, 2000 aggregated $935,000, consisting of payroll expenses of
$498,000, professional fees of $35,000, general and administrative expense of
$225,000, rental cost of $33,000, and depreciation and amortization of $144,000.
During the period from March 22, 2000 to September 30, 2000, Oaktree had
revenues of $1,899,000 and cost of sales of $320,000 and a gross profit of
$1,579,000. Gateway's consolidated costs and expenses for the nine month period
ended September 30, 2000 totaled $2,114,000, including payroll expenses of
$1,032,000, professional fees of $154,000, general and administrative expenses
of $643,000, rental costs of $61,000, and depreciation and amortization of
$224,000.
The proforma income statement in Note 3 shows that the net loss incurred by
the Company for the three and nine months ended September 30, 2000 calculated as
if Oaktree had been acquired on January 1, 1999, decreased for the three month
period and increased for the nine month period over the net loss incurred during
the same periods in 1999. Sales are higher in both periods in 2000 versus 1999.
Higher expenses in 2000 are attributable to increased payroll and related costs
at Oaktree that were incurred as a result of increased sales in 2000 and in
preparation for higher sales expected to be realized starting in early 2001.
<PAGE>
OTHER INCOME
During the third quarter of 2000, the Company recognized $42,000 of net
interest income compared with $58,000 in the comparable period of 1999. For the
nine months ended September 30, 2000, other income totaled $169,000 including
interest income of $150,000 and other income of $19,000. For the nine months
ended September 30, 1999, other income consisted of interest income of $169,000
and other income of $15,000. The difference results primarily from less cash
equivalents on hand during 2000 earning interest income since the Company
invested cash in the operating business of Oaktree in March 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $3,064,000 at September 30,
2000 and $5,465,000 at December 31, 1999. $2,643,000 cash was expended March 21,
2000 for the acquisition of Oaktree. At September 30, 2000, the Company's
working capital balance was $2,767,000. There were no long term liabilities.
While the Company seeks an acquisition or other business combination,
management believes its cash position is sufficient to cover administrative
expenses and current obligations for the foreseeable future.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule (filed as part of the electronic
filing only)
(b) Reports on Form 8-K
The Registrant filed the following current report on
Form 8-K during the period covered by this report:
(i) Report on Form 8-K as amended dated May 22, 2000,
reporting the acquisition of Oaktree.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
/s/ Jack Howard
Jack Howard, Acting President
Date: November 13, 2000
