sec document
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, 2002
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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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 Including Zip Code)
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
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Shares of Issuer's Common Stock Outstanding at May 1, 2002: 4,192,024
Transitional Small Business Disclosure Format Yes No X
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INDEX
Part I - Financial Information Page Number
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Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001........................ 2
Condensed Consolidated Statements
of Operations - Three Months Ended
March 31, 2002 and 2001..................................... 3
Condensed Consolidated Statements
of Cash Flows - Three Months Ended
March 31, 2002 and 2001..................................... 4
Notes to Condensed Consolidated Financial Statements........ 5, 6
Item 2. Management's Discussion and Analysis
or Plan of Operations..................................... 6,7,8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K........................... 9
Signatures................................................. 10
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS March 31, 2002 December 31, 2001
Cash and cash equivalents $ 1,730,966 $ 2,041,315
Accounts receivable, net 834,833 863,702
Prepaid Expenses 34,847 64,109
Other current assets 84,873 44,602
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Total current assets 2,685,519 3,013,728
Fixed assets, net 399,940 407,251
Other assets 225,796 243,524
Goodwill, net 2,762,607 2,762,607
------------ ------------
Total assets $ 6,073,862 $ 6,427,110
============ ============
Liabilities and Shareholders' Equity
Liabilities
Accounts payable and accrued expenses $ 256,758 $ 570,218
Deferred income 257,288 269,735
Customer deposits 30,914 69,942
Current portion, capital lease 7,659 11,000
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Total current liabilities 552,619 920,895
Capital lease obligation 11,915 13,496
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Total liabilities 564,534 934,391
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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; 4,192,024 shares issued and outstanding at March 31,
2002 and December 31, 2001, respectively 4,192 4,192
Capital in excess of par value 11,045,650 11,045,650
Accumulated deficit (5,494,610) (5,511,219)
Treasury stock, 11,513 shares of common stock, at cost (45,904) (45,904)
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Total shareholders' equity 5,509,328 5,492,719
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Total liabilities and shareholders' equity $ 6,073,862 $ 6,427,110
============ ============
The accompanying notes are an integral part of these statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended March 31,
2002 2001
---- ----
Revenues $ 1,424,179 $ 969,894
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Costs and expenses
Fulfillment and materials 129,084 6,607
Personnel costs 853,005 754,521
Selling, general and administrative 426,170 441,273
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Total costs and expenses 1,408,259 1,202,401
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Operating income or (loss) 15,920 (232,507)
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Other income
Interest 7,399 33,164
Other income (expenses), net (6,710) (1,794)
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Total other income 689 31,370
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Net income (loss) $ 16,609 $ (201,137)
=========== ===========
Net Income (loss) per share - basic and diluted $ .00 $ (.05)
=========== ===========
Weighted average shares outstanding used in
computing basic and diluted net loss per share 4,192,024 4,192,024
=========== ===========
The accompanying notes are an integral part of these statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net Income (loss) $ 16,609 $ (201,137)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation 27,721 20,163
Amortization of goodwill and other intangibles 17,730 59,338
Provision for bad debt -- (1,000)
Changes in assets and liabilities net of assets and liabilities acquired:
Accounts receivable 28,869 (250,336)
Prepaid expenses and other (11,009) (20,000)
Security deposit -- 41,835
Accounts payable (313,460) 79,326
Deferred income (12,447) (8,323)
Customer deposits (39,028) (14,089)
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Net cash used in operating activities (285,015) (294,223)
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Cash flows from investing activities:
Purchase of property, plant, and equipment (20,410)
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Net cash used in investing activities (20,410) --
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Cash flows from financing activities:
Payments of obligation on capital lease (4,924) (9,027)
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Net cash provided by financing activities (4,924) (9,027)
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Net decrease in cash and cash equivalents (310,349) (303,250)
Cash and cash equivalents at beginning of period 2,041,315 2,604,394
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Cash and cash equivalents at end of period $ 1,730,966 $ 2,301,144
=========== ===========
Supplemental information:
Oaktree acquired $23,000 of assets under a capital lease in 2001.
The accompanying notes are an integral part of these statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
Note 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, 2002 are
not necessarily indicative of the results that may be expected either for any
other quarter in the year ending December 31, 2002 or for the entire year ending
December 31, 2002. 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, 2001.
Note 2. Operations
Gateway Industries, Inc. (the "Company") was incorporated in
Delaware in July 1994. It acquired all of the outstanding common stock of
Oaktree Systems, Inc. ("Oaktree") in March 2000. 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 Systems, Inc. ("Oaktree") in March 2000. The Company's
officers and Steel Partners Services, Ltd. (an entity controlled by the
Company's Chairman) devoted significant time to the Company's administration and
in exploring potential acquisitions and other business opportunities.
Note 3. Net Income (Loss) Per Share
Net Income (loss) per share was calculated using the weighted
average number of common shares outstanding. For the three months ended March
31, 2002 and 2001, stock options excluded from the calculation of diluted loss
per share are 592,500 and 460,500 respectively as their effect would have been
antidilutive. Accordingly, basic and diluted income per share is the same for
the three months ended March 31, 2002 and 2001.
Note 4. Adoption of Recently Issued Accounting Standard
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142 Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and indefinite lived intangible assets are
no longer amortized but will be reviewed at least annually for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The Company completed the
first of the required impairment tests of goodwill during the three months ended
March 31, 2002 and no adjustment to the carrying value of goodwill was required.
If the Company continued amortizing goodwill the net income would
have been decreased by $52,000 or $.01 per share for the three months ended
March 31, 2002. The Company recorded amortization of goodwill for the three
months ended March 31, 2001 of $52,000, if this standard was adopted as of
January 1, 2001 the pro-forma net loss for the three months ended March 31, 2001
would have been $149,137 or $0.04 per share.
There has been no change to the carrying value of the Company's
goodwill since January 1, 2002. The Company's intangible assets subject to
amortization primarily consists of software totaling $363,329 and the related
amortization expense was $17,730 for each of the three months ended March 31,
2002 and 2001. There were no other intangible assets with indefinite useful
lives.
In January 2002 the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, ("SFAS 144"). This supercedes SFAS
121, Accounting for the Impairment of Long-Lived Assets and for Long Lived
5
Assets to be Disposed of, while retaining many of the requirements of such
statement. There was no significant impact on the financial statements upon
adoption.
Note 5. Reclassification
Certain amounts from the prior year have been reclassified to
conform to the current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction
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
$650,000 of debt, which was repaid at the closing date, plus certain fees and
expenses.
Oaktree is a nineteen year-old company specializing in providing
cost effective marketing solutions to organizations needing sophisticated
information management tools. In the past, these systems were found principally
only on mainframe and minicomputer systems. Oaktree has developed a
sophisticated PC based relational database that provides unlimited capacity and
flexibility to meet today's demanding informational needs. Oaktree has also
implemented a state-of-the-art Data Center that incorporates the latest
Client/Server based PC architecture. Oaktree currently manages direct marketing
databases for clients which contain over 25 million customers that include a
related 100 million transactions.
Oaktree provides a full set of database marketing solutions that
cover the full range of customer interaction. These entirely Web based solutions
allow our customers to manage their marketing promotions and the supporting
operational systems from their desktops in a real-time mode. The Internet is the
preferred medium for providing information and reports to our clients. All
reports, data access and the status of production jobs are available to
customers 24 hours a day, seven days a week simply by accessing their desktop
browsers. With Oaktree providing a single source solution, all data will reflect
a real-time status, meaning that reports will reflect information that is
accurate and up-to-date. Multiple levels of security provide a high degree of
data integrity and protection.
Oaktree's proprietary, integrated database allows clients with
e-commerce, subscription, product fulfillment and fundraising businesses to
utilize a single, customer focused database to do all of their marketing
promotions and response analysis. Clients can track their businesses on a real
time basis and make immediate decisions to adjust marketing promotions and/or
production schedules. Oaktree's new Internet initiatives and the release of its
database product DB-Cultivator will allow us to offer better expansion of
services to existing customers and will generate quarter-to-quarter growth.
6
REVENUES AND EXPENSES FOR OAKTREE SUBSIDIARY
Three Months ended March 31, 2002 compared to three months ended
March 31, 2001. Oaktree had revenues of $1,424,179 for the three months ended
March 31, 2002 compared to $969,894 for the comparable period in 2001, a 47%
increase. This increase was due primarily to customers expanding their use of
Oaktree's services, including new services such as, Product fulfillment, Lockbox
and Call center operations. Oaktree introduced these services in 2001.
Fulfillment and materials costs were $129,084 for the three months
ended March 31, 2002 compared to $6,607 for the comparable period in 2001, a
1854% increase. This increase was due primarily to the cost of operations of
Oaktree's new product fulfillment facility, Lockbox and call center operation,
which was developed in 2001.
Personnel costs were $853,005 for the three months ended March 31,
2002 compared to $754,521 for the comparable period in 2001or, a 13% increase.
This increase was due primarily to the development of an internal finance and
accounting department and personnel cost associated with the new products
offered by Oaktree, which increased staff salaries.
Selling, general & administrative expenses were $275,890 for the
three months ended March 31, 2002 compared to $302,544 for the comparable period
in 2001, a decrease of 8.8%. This was due primarily to cost reductions achieved
by implementing improvements to internal policies and procedures which reduced
unnecessary spending.
Oaktree had net profits of $163,331 for the three months ended March
31, 2002, compared to a net loss of $94,361 for the comparable period in 2001, a
273% increase. This increase was primarily due to increased sales and internal
restructuring of processes and procedures.
INCOME AND EXPENSES NOT ASSOCIATED WITH OAKTREE SUBSIDIARY
The company's consolidated costs and expenses for the three months
ended March 31, 2002 aggregated $153,750, consisting of various selling, general
and administrative expenses. Other income of $7,027 for the three months ended
March 31, 2002 compared to $31,953 for the comparable period in 2001 consisted
of interest earned on available cash and cash equivalents. This decrease in
interest income in 2002 over the 2001 three month period was due primarily to
decreasing money market rates earned on cash held by the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $1,730,966 at March
31, 2002 and $2,041,315 at December 31, 2001. The Company continues to seek an
acquisition or other business combination; although no definitive agreements,
arrangements or understandings have been reached. Management believes its cash
position is sufficient to cover administrative expenses and current obligations
for the foreseeable future.
7
Critical Accounting Policies
Adoption Of Recently Issued Accounting Standards
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142 Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and indefinite lived intangible assets are
no longer amortized but will be reviewed at least annually for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The Company completed the
first of the required impairment tests of goodwill during the three months ended
March 31, 2002 and no adjustment to the carrying value of goodwill was required.
If the Company continued amortizing goodwill the net income would
have been decreased by $52,000 or $.01 per share for the three months ended
March 31, 2002. The Company recorded amortization of goodwill for the three
months ended March 31, 2001 of $52,000, if this standard was adopted as of
January 1, 2001 the pro-forma net loss for the three months ended March 31, 2001
would have been $149,137 or $0.04 per share.
There has been no change to the carrying value of the Company's
goodwill since January 1, 2002. The Company's intangible assets subject to
amortization primarily consists of software totaling $363,329 and the related
amortization expense was $17,730 for each of the three months ended March 31,
2002 and 2001. There were no other intangible assets with indefinite useful
lives.
In January 2002 the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, ("SFAS 144"). This supercedes SFAS
121, Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed of, while retaining many of the requirements of such
statement. There was no significant impact on the financial statements upon
adoption.
8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
9
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
GATEWAY INDUSTRIES, INC.
/s/ Maritza Ramirez
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Maritza Ramirez,
Chief Financial Officer
Date: May 15, 2002