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 March 31, 2000.
[ ] Transition report under Section 13 or 15(d)
of the Exchange Act
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 May 15, 2000: 4,192,024
Transitional small business disclosure format:
Yes [ ] No [X]
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION Page Number
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited):
Condensed Consolidated Balance Sheet
March 31, 2000............................................... 3
Condensed Consolidated Statements
of Operations - Three Months Ended
March 31, 2000 and 1999 ..................................... 4
Condensed Consolidated Statements
of Cash Flows - Three Months Ended
March 31, 2000 and 1999...................................... 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis
or Plan of Operations........................................ 7
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K............................. 8
Signatures................................................... 9
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................... $ 2,809,000
Accounts receivable......................................... 308,000
Prepaid expenses and other.................................. 34,000
------------
Total current assets.................................... 3,151,000
Other assets:
Security deposits........................................... 53,000
Property, plant and equipment, net.......................... 321,000
Goodwill and other intangibles, net......................... 3,481,000
------------
Total other assets...................................... 3,855,000
------------
Total assets ................................................... $ 7,006,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses....................... $ 260,000
Capital lease obligation.................................... 22,000
------------
Total current liabilities............................... $ 282,000
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............................... 11,047,000
Accumulated deficit.......................................... (4,281,000)
Treasury stock, 11,513 shares of common stock................ (46,000)
------------
Total shareholders' equity.............................. 6,724,000
------------
Total liabilities & shareholders' equity......................... $ 7,006,000
=============
See accompanying notes.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Sales................................................................ $ 63,000 --
Cost of sales ....................................................... 15,000 --
------------ ------------
Gross profit ....................................................... 48,000 --
Costs and expenses:
Professional fees................................................ 76,000 13,000
General and administrative....................................... 173,000 53,000
Depreciation and amortization.................................... 6,000 --
------------ ------------
Total costs and expenses..................................... 255,000 66,000
Operating loss................................................... (207,000) (66,000)
Other income
Interest income.............................................. 65,000 68,000
Other income:................................................ 18,000 --
------------ ------------
Total other income........................................... 83,000 68,000
Net income (loss)..................................................... $ (124,000) 2,000
============ ============
Net income (loss) per share - basic and diluted....................... $ (.03) --
Weighted average number of shares..................................... 3,657,958 3,592,024
</TABLE>
See accompanying notes.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (124,000) 2,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of goodwill 6,000 --
Changes in assets and liabilities:
Accounts receivable 68,000 --
Prepaid expenses and other 74,000 (26,000)
Security deposit 20,000 --
Accounts payable (40,000) (37,000)
------------- --------------
Net cash provided by (used in) operating activities 4,000 (61,000)
Cash flows from investing activities:
Purchase of property, plant, and equipment (1,000) --
Purchase of Oaktree Systems Inc., net of cash acquired (2,659,000) --
Note receivable -- 566,000
------------- --------------
Net cash provided by (used in) investing activities (2,660,000) 566,000
Net increase/(decrease) in cash and cash equivalents (2,656,000) 505,000
Cash and cash equivalents at beginning of period 5,465,000 5,140,000
------------- --------------
Cash and cash equivalents at end of period $ 2,809,000 5,645,000
============= ==============
</TABLE>
On March 21, 2000, the Company acquired 100% of the common stock of Oaktree
Systems, Inc. for $4,090,000 which included the issuance of 600,000 shares of
common stock of Gateway Industries, Inc. (see Note 3).
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 months ended March 31, 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 throughout
the United States: such customers are principally not-for-profit entities,
health care providers and publishers.
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.
3. PURCHASE OF SUBSIDIARY
During 2000 the Company acquired 100% of the outstanding stock of Oaktree
for a purchase price of $4,090,000, consisting of $2,000,000 in cash, the
issuance of 600,000 shares of common stock of Gateway, the repayment of existing
Oaktree bank debt of $640,000 and expenses of $82,000. The acquisition was
accounted for as a purchase, and, accordingly include the results of operations
since the date of acquisition. The following is a summary of the effect of this
transaction in the Company's consolidated balance sheet: The excess of purchase
price over the fair value of net assets acquired was recorded as goodwill and
other intangible assets, 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 been in effect in each of the
quarters ending March 31, 2000 and 1999 are as follows:
March 31,
2000 1999
---- ----
Sales $ 721,000 745,000
Cost of expenses 1,103,000 872,000
Other (income) expense (68,000) (59,000)
------------ -------------
Net loss $ (314,000) (68,000)
============ =============
Net loss per share $ (.09) (.02)
<PAGE>
Assets acquired and liabilities acquired at estimated fair value at March
21, 2000 are as follows:
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)
----------
$ 603,000
4. 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 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. During
1999, Oaktree entered into a lease for 806 square feet in St. Paul, Minnesota
expiring on Dec 31, 2000.
Future minimum lease payments under these leases are as follows:
Deduct Net
Sublease Rental
Commitments Rentals Commitments
----------- ------- -----------
2000 199,000 65,000 134,000
2001 117,000 16,000 101,000
2002 96,000 -- 96,000
-------- -------- --------
$412,000 $ 81,000 $331,000
5. NET INCOME PER SHARE
Net income (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 quarters ended March 31,
2000 and 1999, as such items are anti-dilutive in these quarters; accordingly,
basic and diluted income per share are the same for the quarters ended March 31,
2000 and 1999.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Company acquired Oaktree on March 21, 2000 pursuant to a Stock Purchase
Agreement. The purchase price of Oaktree was 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), plus certain fees and expenses.
Oaktree had revenues of approximately $3.0 million in 1999 and was
marginally 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 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 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.
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 March 25, 2000, Oaktree employed 50 full 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's newly acquired subsidiary, Oaktree had $63,000 revenues
during the nine day period of March 22, 2000 to March 31, 2000. Gateway's
expenses for the quarter ended March 31, 2000 aggregated $153,000, consisting of
professional fees of $76,000 ($48,000 were legal fees for the resolution of the
Marsel case and $28,000 other legal and accounting expenses, most of which were
greater than in the comparable 1999 period). General and administrative expense
of Oaktree for the nine day period of March 22 to 31, 2000 were $102,000.
INTEREST INCOME, NET
During the first quarter of 2000, the Company recognized $65,000 of net
interest income compared with $68,000 in the comparable period of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $2,809,000 at March 31,
2000 and $5,645,000 at December 31, 1999. $2,643,000 cash was expended March 21,
2000 for the acquisition of Oaktree. Collection of the note receivable owed by
Only Multimedia Network, Inc. ("OMNI") during the first quarter of 1999
accounted for $581,000 of the increased cash position in 1999. At March 31,
2000, the Company's working capital balance was $2,869,000.
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 dated March 31, 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.
By /s/Jack Howard
--------------------
Jack Howard, Acting President
Date: May 15, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000725876
<NAME> GATEWAY INDUSTRIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 2,809
<SECURITIES> 0
<RECEIVABLES> 308
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 53
<PP&E> 321
<DEPRECIATION> 6
<TOTAL-ASSETS> 7,006
<CURRENT-LIABILITIES> 282
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 6,720
<TOTAL-LIABILITY-AND-EQUITY> 7,006
<SALES> 63
<TOTAL-REVENUES> 63
<CGS> 15
<TOTAL-COSTS> 15
<OTHER-EXPENSES> 255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
