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 June 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 June 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
June 30, 2000..................................................... 2
Condensed Consolidated Statements
of Operations - Three Months Ended
June 30, 2000 and 1999 ........................................... 3
Condensed Consolidated Statements
of Operations - Six Months Ended
June 30, 2000 and 1999 ........................................... 4
Condensed Consolidated Statements
of Cash Flows - Six Months Ended
June 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
June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents............................................................... $ 2,630,000
Accounts receivable..................................................................... 725,000
Prepaid expenses and other.............................................................. 47,000
------------
Total current assets................................................................ 3,402,000
------------
Other assets:
Security deposits....................................................................... 46,000
Property, plant and equipment, net...................................................... 337,000
Goodwill and other intangibles, net..................................................... 3,431,000
------------
Total other assets.................................................................. 3,814,000
------------
Total assets ............................................................................... $ 7,216,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses................................................... $ 236,000
Deferred income......................................................................... 247,000
Bank debt............................................................................... 75,000
Note payable............................................................................ 60,000
Capital lease obligation................................................................ 18,000
------------
Total current liabilities........................................................... $ 636,000
------------
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.......................................................... 11,055,000
Accumulated deficit..................................................................... (4,433,000)
Treasury stock, 11,513 shares of common stock........................................... (46,000)
------------
Total shareholders' equity.......................................................... 6,580,000
------------
Total liabilities and shareholders' equity................................................... $ 7,216,000
============
</TABLE>
See accompanying notes.
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Sales........................................................................... $ 900,000 --
Cost of sales .................................................................. 172,000 --
------------ ------------
Gross profit .................................................................. 728,000 --
Costs and expenses:
Payroll expenses........................................................... $ 534,000 $ --
Professional fees.......................................................... 43,000 --
Occupancy.................................................................. 28,000 --
General and administrative................................................. 245,000 134,000
Depreciation and amortization.............................................. 74,000 --
------------ ------------
Total costs and expenses............................................... 924,000 134,000
------------ ------------
Operating loss............................................................. (196,000) (134,000)
Other income
Interest income:....................................................... 44,000 57,000
------------ ------------
Net loss........................................................................ $ (152,000) (77,000)
============= =============
Net loss per share - basic and diluted.......................................... $ (.04) (.02)
Weighted average number of shares............................................... 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 Six Months
Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Sales........................................................................... $ 963,000 --
Cost of sales .................................................................. 187,000 --
------------ ------------
Gross profit .................................................................. 776,000 --
Costs and expenses:
Payroll expenses........................................................... $ 534,000 --
Professional fees.......................................................... 119,000 --
Occupancy.................................................................. 28,000 --
General and administrative................................................. 418,000 201,000
Depreciation and amortization.............................................. 80,000 --
------------ ------------
Total costs and expenses............................................... 1,179,000 201,000
------------ ------------
Operating loss............................................................. (403,000) (201,000)
Other income:
Interest income........................................................ 109,000 126,000
Other income........................................................... 18,000 --
------------ ------------
Total other income..................................................... 127,000 126,000
Net loss........................................................................ $ (276,000) (75,000)
============= =============
Net loss per share - basic and diluted.......................................... $ (.07) (.02)
Weighted average number of shares............................................... 3,924,991 3,592,024
</TABLE>
See accompanying notes.
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (276,000) (75,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization of goodwill 80,000 --
Changes in assets and liabilities net of assets and liabilities acquired:
Accounts receivable (349,000) --
Prepaid expenses and other 62,000 (18,000)
Security deposit 27,000 20,000
Accounts payable (30,000) (15,000)
Deferred income 247,000 --
------------- --------------
Net cash used in operating activities (239,000) (88,000)
Cash flows from investing activities:
Purchase of property, plant, and equipment (17,000) --
Purchase of Oaktree Systems Inc., net of cash acquired (2,710,000) --
Note receivable -- 566,000
------------- --------------
Net cash (used in) provided by investing activities (2,727,000) 566,000
Cash flows from financing activities:
Repayment of capital lease (4,000) --
Proceeds from note payable 60,000 --
Proceeds from bank debt 75,000 --
------------- --------------
Net cash provided by financing activities 131,000 --
Net (decrease) increase in cash and cash equivalents (2,835,000) 478,000
Cash and cash equivalents at beginning of period 5,465,000 5,140,000
------------- --------------
Cash and cash equivalents at end of period $ 2,630,000 5,618,000
============= ==============
</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>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six months ended June 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 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
March 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 of
$3,137,000 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 the beginning of each
of the three and six months ended June 30, 2000 and 1999.
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Sales $ 900,000 678,000 1,621,000 1,328,000
Cost of expenses 1,096,000 895,000 2,214,000 1,583,000
Other income 44,000 63,000 129,000 138,000
----------- ----------- ---------- ----------
Net loss $ (152,000) (154,000) (464,000) (117,000)
=========== =========== ========== ===========
Net loss per share
--basic and diluted $ (.04) (.04) (.11) (.03)
</TABLE>
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 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:
Deduct Net
Sublease Rental
Commitments Rentals Commitments
2000 113,000 33,000 80,000
2001 126,000 16,000 110,000
2002 105,000 -- 105,000
-------- -------- --------
$344,000 $49,000 $295,000
======== ======== ========
5. 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 six months ended June
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
six months ended June 30, 2000 and 1999.
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
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 June 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 June 30, 2000, Oaktree had revenues of
$900,000 and cost of sales of $172,000 and a gross profit of $728,000. Gateway's
consolidated costs and expenses for the three month period ended June 30, 2000
aggregated $924,000, consisting of payroll expenses of $534,000, professional
fees of $43,000, general and administrative expense of $245,000, rental cost of
$28,000, and depreciation and amortization of $74,000.
During the period from March 22, 2000 to June 30, 2000, Oaktree had
revenues of $963,000 and cost of sales of $187,000 and a gross profit of
$776,000. Gateway's consolidated costs and expenses for the six month period
ended June 30, 2000 aggregated $1,179,000, consisting of payroll expenses of
$534,000, professional fees of $119,000, general and administrative expenses of
$418,000, rental costs of $28,000, and depreciation and amortization of $80,000.
The proforma income statement in note 3 shows that the net loss incurred by
the Company for the three and six months ended June 30, 2000 calculated as if
Oaktree had been acquired on January 1, 1999, increased 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 in preparation for the
commencement of service in July 2000 to a large new client.
<PAGE>
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
OTHER INCOME
During the second quarter of 2000, the Company recognized $44,000 of net
interest income compared with $57,000 in the comparable period of 1999. For the
six months ended June 30, 2000, other income totaled $127,000 including interest
income of $109,000 and other income of $18,000. For the six months ended June
30, 1999, other income consisted of interest income of $126,000. The difference
results primarily from less cash equivalents on hand earning interest income due
to the Company's acquisition of Oaktree during March 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $2,630,000 at June 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 June 30, 2000, the Company's working capital
balance was $2,766,000. There was approximately $135,000 in borrowings
outstanding on bank debt and a note payable.
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.
By /s/Jack Howard
----------------------------
Jack Howard, Acting President
Date: August 14, 2000
