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 June 30, 2003
/ / 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.)
590 Madison Avenue, 32nd Floor
New York, NY 10022
------------------
(Address of Principal Executive Offices Including Zip Code)
212-758-3232
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Shares of Issuer's Common Stock Outstanding at July 15, 2003: 4,192,105
Transitional Small Business Disclosure Format: Yes / / No /X/
INDEX
Part I - Financial Information Page Number
------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002.......................... 2
Condensed Consolidated Statements
of Operations - Three Months Ended
June 30, 2003 and 2002....................................... 3
Condensed Consolidated Statements
of Operations - Six Months Ended
June 30, 2003 and 2002....................................... 4
Condensed Consolidated Statements
of Cash Flows - Six Months Ended
June 30, 2003 and 2002....................................... 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis or Plan of Operation.... 10
Item 3. Controls and Procedures...................................... 15
Part II - Other Information
---------------------------
Item 2. Changes in Securities and Use of Proceeds.................... 16
Item 6. Exhibits and Reports on Form 8-K............................. 17
Signatures................................................... 18
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 2003 December 31, 2002
(Unaudited)
Cash and cash equivalents $ 1,363,119 $ 1,844,512
Investments 25,517 --
Accounts receivable, net 1,012,925 800,766
Prepaid expenses 162,299 94,652
Other current assets 53,798 45,584
------------ ------------
Total current assets 2,617,658 2,785,514
Fixed assets, net 403,328 379,050
Software, net 182,091 165,066
Goodwill, net 2,751,288 2,751,288
Security deposits 25,154 18,857
------------ ------------
Total assets $ 5,979,519 $ 6,099,775
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses $ 445,206 $ 278,308
Deferred income 226,682 227,537
Customer deposits 40,788 40,958
Current portion, capital lease 45,759 10,010
------------ ------------
Total current liabilities 758,435 556,813
Capital lease obligation 85,793 16,165
------------ ------------
Total liabilities 844,228 572,978
------------ ------------
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; 4,192,105 shares issued and outstanding at June
30, 2003 and 4,192,000 shares issued and outstanding at
December 31, 2002 4,192 4,192
Capital in excess of par value 10,999,746 10,999,746
Accumulated deficit (5,868,647) (5,477,141)
------------ ------------
Total shareholders' equity 5,135,291 5,526,797
------------ ------------
Total liabilities and shareholders' equity $ 5,979,519 $ 6,099,775
============ ============
The accompanying notes are an integral part of these statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended June 30,
2003 2002
---- ----
Revenues $ 1,577,196 $ 1,399,439
----------- -----------
Costs and expenses
Fulfillment and materials 247,383 179,828
Personnel costs 1,059,900 891,632
Selling, general and administrative 494,779 326,075
----------- -----------
Total costs and expenses 1,802,062 1,397,535
----------- -----------
Operating (loss) income (224,866) 1,904
----------- -----------
Other income (expense)
Interest 2,510 7,773
Other expense, net (4,385) (3,988)
----------- -----------
Total other (expense) income (1,875) 3,785
----------- -----------
Net (loss) income $ (226,741) $ 5,689
=========== ===========
Net (loss) income per share - basic $ (.05) $ .00
=========== ===========
Net (loss) income per share - diluted $ (.05) $ .00
=========== ===========
Weighted average shares outstanding - basic 4,192,105 4,192,024
=========== ===========
Weighted average shares outstanding - diluted 4,192,105 4,192,024
=========== ===========
The accompanying notes are an integral part of these statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months
Ended June 30,
2003 2002
---- ----
Revenues $ 3,066,519 $ 2,823,618
----------- -----------
Costs and expenses
Fulfillment and materials 413,933 308,912
Personnel costs 2,120,568 1,744,637
Selling, general and administrative 921,198 755,715
----------- -----------
Total costs and expenses 3,455,699 2,809,264
----------- -----------
Operating (loss) income (389,180) 14,354
----------- -----------
Other income (expense)
Interest 5,156 15,172
Other expense ,net (7,482) (7,227)
----------- -----------
Total other (expense) income (2,326) 7,945
----------- -----------
Net (loss) income $ (391,506) $ 22,299
=========== ===========
Net (loss) income per share - basic $ (.09) $ .01
=========== ===========
Net (loss) income per share - diluted $ (.09) $ .01
=========== ===========
Weighted average shares outstanding - basic 4,192,105 4,192,024
=========== ===========
Weighted average shares outstanding - diluted 4,192,105 4,192,024
=========== ===========
The accompanying notes are an integral part of these statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
Ended June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net (loss) income $ (391,506) $ 22,299
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation 74,486 57,590
Amortization of software costs 45,031 35,460
Changes in assets and liabilities net of assets and liabilities
acquired:
Accounts receivable (212,159) (26,264)
Prepaid expenses and other (62,916) (6,996)
Security deposit (6,297) --
Accounts payable 166,898 (278,839)
Deferred income (855) (42,198)
Customer deposits (170) (32,233)
----------- -----------
Net cash used in operating activities (387,488) (271,181)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant, and equipment (58,033) (50,428)
Purchase of investments (25,517) --
----------- -----------
Net cash used in investing activities (83,550) (50,428)
----------- -----------
Cash flows from financing activities:
Payments of obligation on capital lease (10,355) (5,027)
----------- -----------
Net cash used in financing activities (10,355) (5,027)
----------- -----------
Net decrease in cash and cash equivalents (481,393) (326,636)
Cash and cash equivalents at beginning of period 1,844,512 2,041,315
----------- -----------
Cash and cash equivalents at end of period $ 1,363,119 $ 1,714,679
=========== ===========
Supplemental cash flow information:
Cash paid during the year for
Income taxes $ 19,860 $ 14,182
Interest expense $ 5,364 $ 4,855
Supplemental information:
Oaktree acquired $101,749 of assets under capital leases in 2003 and $4,770 in
2002.
The accompanying notes are an integral part of these statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(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 include all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation. Results for the six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected either for any other quarter in
the year ending December 31, 2003 or for the entire year ending December 31,
2003. 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, 2002.
NOTE 2. OPERATIONS
Gateway Industries, Inc. (the "Company") was incorporated in Delaware in
July 1994 and acquired all of the outstanding common stock of Oaktree Systems,
Inc. ("Oaktree") in March 2000. Oaktree provides real-time database development
consolidation and management services, such as database marketing, product
fulfillment, subscription fulfillment, 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. The Company's officers and Steel Partners Services, Ltd.
(an entity controlled by the Company's Chairman) devote significant time to the
Company's administration and 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 six months ended June 30, 2003 and
2002, stock options excluded from the calculation of diluted loss per share were
1,069,000 and 592,500, respectively, as their effect would have been
antidilutive. For the three months ended June 30, 2003 and 2002, stock options
excluded from the calculation of diluted loss per share were 1,069,000 and
592,500, respectively, as their effect would have been antidilutive.
Accordingly, basic and diluted income per share is the same for each of the
three month and six month periods ended June 30, 2003 and 2002.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145 RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS SFAS 145. This Statement rescinds FASB Statement No. 4, REPORTING
GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT, and an amendment of that
Statement, FASB Statement No. 64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY
SINKING-FUND REQUIREMENTS. This Statement also rescinds FASB Statement No. 44,
ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS. This Statement amends FASB
Statement No.
6
13, ACCOUNTING FOR LEASES, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Effective
January 1, 2003, the Company adopted the provisions of SFAS 145 which did not
have a material impact on the results of operations or financial position of the
Company for the six months ended June 30, 2003.
In July 2002, the FASB Issued Statement No. 146 ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES SFAS 146. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between this Statement and Issue 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities
initiated after December 31, 2002. Effective January 1, 2003, the Company
adopted the provisions of SFAS 146 which did not have a material impact on the
results of operations or financial position of the Company for the six months
ended June 30, 2003.
In November 2002, the FASB issued Interpretation No. 45, "GUARANTORS
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS" ("FIN 45"). FIN 45 requires that certain
guarantees be initially recorded at fair value, which is different from the
general current practice of recording a liability only when a loss is probable
and reasonably estimable. FIN 45 also requires a guarantor to make significant
new disclosures for virtually all guarantees. The Company adopted the disclosure
requirements under FIN 45 for the quarter ended March 31, 2003 and has adopted
the initial recognition and initial measurement provisions for any guarantees
issued or modified after March 31, 2003. The adoption of FIN 45 did not have a
material impact on the results of operations or financial position of the
Company for the six months ended June 30, 2003.
On December 31, 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR STOCK
BASED COMPENSATION TRANSITION AND DISCLOSURE, SFAS 148 AMENDS FASB STATEMENT NO.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION", to provide alternative methods of
transition to SFAS 123's fair value method of accounting for stock-based
employee compensation. SFAS 148 also amends the disclosure provisions of SFAS
123 and APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS 148 does not amend SFAS 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions of
SFAS 148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for the compensation using the fair value
method of SFAS 123 or the intrinsic value method of APB Opinion 25. The Company
adopted the required disclosure provisions of SFAS 148. See Note 5.
In January 2003, the FASB issued interpretation No. 46, "CONSOLIDATION OF
VARIABLE INTEREST ENTITIES - AN INTERPRETATION OF ARB No. 51" ("FIN 46"), which
addresses consolidation of variable interest entities. FIN 46 expands the
criteria for consideration in determining whether a variable interest entity
7
should be consolidated by a business entity, and requires existing
unconsolidated variable interest entities (which include, but are not limited
to, Special Purpose Entities, or SPE's) to be consolidated by their primary
beneficiaries if the entities do not effectively disburse risks among parties
involved. This interpretation applies immediately to variable interest entities
created after January 31, 2003, and variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 is not expected to have a
material impact on the results of operations or financial position of the
Company.
In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS 149 was issued to amend
and clarify financial accounting and reporting for derivative instruments and
hedging activities under SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES. Specifically, this Standard clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative and when a derivative contains a financing component.
Additionally, SFAS 149 amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND
DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS, and amends certain other existing pronouncements. SFAS
149 is effective for contracts entered into or modified subsequent to June 30,
2003 and hedging relationships designated subsequent to June 30, 2003. The
provisions of this Standard are to be applied prospectively. The adoption of
SFAS 149 is not expected to have a material impact on the results of operations
or financial position of the Company.
In May 2003, the FASB issued SFAS 150, "ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." SFAS 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The Standard
requires that certain freestanding financial instruments be classified as
liabilities, including mandatorily redeemable financial instruments, obligations
to repurchase the issuer's equity shares by transferring assets and certain
obligations to issue a variable number of shares. SFAS 150 is effective for
financial instruments entered into or modified subsequent to May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of the Statement and still existing at the beginning of the
interim period of adoption. The Company does not anticipate that the
implementation of SFAS 150 will have a material impact on its financial
position, results of operations or cash flows.
NOTE 5. STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK BASED
COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF SFAS 123, which provided
alternative methods for a voluntary change to the fair value method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The Company has elected to continue to account for its
stock-based employee compensation plans under APB Opinion 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations. The following
disclosures are provided in accordance with SFAS 148.
8
As permitted by FASB Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "ACCOUNTING FOR STOCK-BASED COMPENSATION," the Company has
elected to follow Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"ACCOUNTING FOR STOCK-ISSUED TO EMPLOYEES," and related interpretations in
accounting for its employee stock option plans. Under APB No. 25, no
compensation expense is recognized at the time of option grant because the
exercise price of the Company's employee stock option equals the fair market
value of the underlying common stock on the date of grant.
The exercise price of all other options equals the market price of the
Company's common stock on the date of grant. Accordingly, no compensation cost
has been recognized for the Company's employee stock option plans. Had
compensation cost for such plans been determined based on the fair value of the
options at the grant dates consistent with the method of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below.
Six months ended June 30, 2003 2002
---------------------------------------------------------------------
Actual net (loss) income $ (391,506) $ 22,299
Pro forma net (loss) income $ (402,079) $ 12,454
Actual net (loss) income per share
Basic $ (0.09) $ 0.01
Diluted $ (0.09) $ 0.01
Pro forma net (loss) per share
Basic - Pro forma $ (0.10) $ 0.00
Diluted - Pro forma $ (0.10) $ 0.00
Three months ended June 30, 2003 2002
---------------------------------------------------------------------
Actual net (loss) income $ (226,741) $ 5,689
Pro forma net (loss) income $ (232,028) $ 766
Actual net (loss) income per share
Basic $ (0.05) $ 0.00
Diluted $ (0.05) $ 0.00
Pro forma net (loss) per share
Basic - Pro forma $ (0.06) $ 0.00
Diluted - Pro forma $ (0.06) $ 0.00
The fair value of the above stock-based compensation costs were determined
using the Black-Scholes option valuation model. The Black Scholes option
valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions, are fully transferable and do not
include a discount for large block trades. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility, expected life of the option and other estimates. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes of the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 twenty 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. The Company believes 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 should generate
quarter-to-quarter growth.
Management believes that the competitive landscape continues to favor
Oaktree's PC Database and Internet business model. Management also believes that
customers will pursue solutions that improve operating efficiencies and improve
income potential. Oaktree's products offer both opportunities at lower costs
than traditional, mainframe competitors.
10
REVENUES AND EXPENSES
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
The Company had revenues of $1,577,196 for the three months ended June 30,
2003 compared to $1,399,439 for the comparable period in 2002. The increase is
primarily due to increased revenue from the Company's new Subscription
Fulfillment Product released in November 2002.
Fulfillment and materials costs were $247,383 for the three months ended
June 30, 2003 compared to $179,828 for the comparable period in 2002. This
increase was due primarily to the cost of operations of the Company's new
Subscription Fulfillment Product, which was developed in 2002.
Personnel costs were $1,059,900 for the three months ended June 30, 2003
compared to $891,632 for the comparable period in 2002. This increase was due
primarily to costs associated with the hiring of new industry specific
management to position the Company for future growth.
Selling, general & administrative expenses were $494,779 for the three
months ended June 30, 2003 compared to $326,075 for the comparable period in
2002. This increase was due primarily to the costs associated with the addition
of a sales department in the second quarter of 2003.
Other income & expenses were $2,510 and $4,385, respectively, for the
three months ended June 30, 2003 compared to $7,773 and $3,988, respectively,
for the comparable period in 2002. The decrease in other income was primarily
due to decreasing money market rates earned on cash held by the Company.
The Company had a net loss of $226,741 for the three months ended June 30,
2003 compared to a net profit of $5,689 for the comparable period in 2002. This
decrease was primarily due to costs associated with the hiring of new industry
specific management and the addition of a sales department to reposition the
Company for future growth.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
The Company had revenues of $3,066,519 for the six months ended June 30,
2003 compared to $2,823,618 for the comparable period in 2002. The increase was
primarily due to increased revenue from the Company's new Subscription
Fulfillment Product released in November 2002.
Fulfillment and materials costs were $413,933 for the six months ended
June 30, 2003 compared to $308,912 for the comparable period in 2002. This
increase was due primarily to the cost of operations of the Company's new
Subscription Fulfillment Product, which was developed in 2002.
Personnel costs were $2,120,568 for the six months ended June 30, 2003
compared to $1,744,637 for the comparable period in 2002. This increase was due
primarily to costs associated with the hiring of new industry specific
management and one time expenses incurred as a result of a reduction in existing
workforce.
Selling, general & administrative expenses were $921,198 for the six
months ended June 30, 2003 compared to $755,715 for the comparable period in
2002. This increase was due primarily to the costs associated with the addition
of a sales department in the second quarter of 2003.
11
Other income & expenses were $5,156 and $7,482, respectively, for the six
months ended June 30, 2003 compared to $15,172 and $7,227, respectively, for the
comparable period in 2002. The decrease in other income was primarily due to
decreasing money market rates earned on cash held by the Company.
The Company had a net loss of $391,506 for the six months ended June 30,
2003 compared to a net profit of $22,299 for the comparable period in 2002. This
decrease was primarily due to costs associated with the hiring of new industry
specific management and the addition of a sales department to reposition the
Company for future growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $1,363,119 at June 30,
2003 and $1,844,512 at December 31, 2002. The Company's cash and cash
equivalents decreased in the first six months of 2003 due primarily to the costs
associated with the hiring of new industry specific management, the addition of
the new sales department, one time expenses incurred as a result of a reduction
in existing workforce and an increase in accounts receivable of $212,159. The
Company continues to seek an acquisition or other business combination.
Management believes its cash position is sufficient to cover administrative
expenses and current obligations for the foreseeable future.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
=======================================================================================================================
Contractual Cash Obligations Payments Due by Period
Total Less than 1 year 1-3 years 4 - 5 years After 5 years
Long Term Debt 0
Capital Lease Obligations $ 155,749 $ 57,769 $ 97,980
Operating Leases $ 516,577 $230,459 $285,664 $454
Unconditional Purchase Obligations 0
Other Long Term Obligations 0
Total Contractual Cash Obligations $ 672,326 $288,228 $383,644 $454
=======================================================================================================================
CRITICAL ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS ("SFAS 145"). This Statement
rescinds FASB Statement No. 4, REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF
DEBT, and an amendment of that Statement, FASB Statement No. 64, EXTINGUISHMENTS
OF DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS. This Statement also rescinds
FASB Statement No. 44, ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS. This
Statement amends FASB Statement No. 13, ACCOUNTING FOR LEASES, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Effective January 1, 2003, the Company adopted the provisions of
SFAS 145 which did not have a material impact on the results of operations or
financial position of the Company for the six months ended June 30, 2003.
12
In July 2002, the FASB Issued Statement No. 146 ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES SFAS 146. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between this Statement and Issue 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. Effective January 1, 2003, the Company
adopted the provisions of SFAS 146 which did not have a material impact on the
results of operations or financial position of the Company for the six months
ended June 30, 2003.
In November 2002, the FASB issued Interpretation No. 45, "GUARANTORS
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS" ("FIN 45"). FIN 45 requires that certain
guarantees be initially recorded at fair value, which is different from the
general current practice of recording a liability only when a loss is probable
and reasonably estimable. FIN 45 also requires a guarantor to make significant
new disclosures for virtually all guarantees. The Company adopted the disclosure
requirements under FIN 45 for the quarter ended March 31, 2003 and has adopted
the initial recognition and initial measurement provisions for any guarantees
issued or modified after March 31, 2003. The adoption of FIN 45 did not have a
material impact on the results of operations or financial position of the
Company for the six months ended June 30, 2003.
On December 31, 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK
BASED COMPENSATION TRANSITION AND DISCLOSURE, SFAS 148 AMENDS FASB STATEMENT NO.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods of
transition to SFAS 123's fair value method of accounting for stock-based
employee compensation. SFAS 148 also amends the disclosure provisions of SFAS
123 and APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS 148 does not amend SFAS 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions of
SFAS 148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for the compensation using the fair value
method of SFAS 123 or the intrinsic value method of APB Opinion 25. The Company
adopted the required disclosure provisions of SFAS No. 148. See Note 5.
In January 2003, the FASB issued interpretation No. 46, "CONSOLIDATION OF
VARIABLE INTEREST ENTITIES - AN INTERPRETATION OF ARB No. 51" ("FIN 46"), which
addresses consolidation of variable interest entities. FIN 46 expands the
criteria for consideration in determining whether a variable interest entity
should be consolidated by a business entity, and requires existing
unconsolidated variable interest entities (which include, but are not limited
to, Special Purpose Entities, or SPE's) to be consolidated by their primary
beneficiaries if the entities do not effectively disburse risks among parties
involved. This interpretation applies immediately to variable interest entities
created after January 31, 2003, and variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 is not expected to have a
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material impact on the results of operations or financial position of the
Company.
In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS 149 was issued to amend
and clarify financial accounting and reporting for derivative instruments and
hedging activities under SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES. Specifically, this Standard clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative and when a derivative contains a financing component.
Additionally, SFAS 149 amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND
DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS, and amends certain other existing pronouncements. SFAS
149 is effective for contracts entered into or modified subsequent to June 30,
2003 and hedging relationships designated subsequent to June 30, 2003. The
provisions of this Standard are to be applied prospectively. The adoption of
SFAS 149 is not expected to have a material impact on the results of operations
or financial position of the Company.
In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." SFAS
150 requires that certain financial instruments, which under previous guidance
were accounted for as equity, must now be accounted for as liabilities. The
Standard requires that certain freestanding financial instruments be classified
as liabilities, including mandatorily redeemable financial instruments,
obligations to repurchase the issuer's equity shares by transferring assets and
certain obligations to issue a variable number of shares. SFAS 150 is effective
for financial instruments entered into or modified subsequent to May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. The Company does not
anticipate that the implementation of SFAS 150 will have a material impact on
its financial position, results of operations or cash flows.
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiary) required to be included in the Company's periodic SEC filings.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
(c) Asset-Backed issuers
Not applicable.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective March 3, 2003, the Company granted Christopher Lynde, the
Chief Executive Officer of the Oaktree subsidiary, nonstatutory stock options to
purchase 125,000 shares of Common Stock under the Company's Amended and Restated
1990 Incentive Stock Option Plan and 1990 Nonstatutory Stock Option Plan at an
exercise price of $2.25 per share. The options vest and become exercisable one
year from the date of grant and terminate eight years from the date of grant.
The issuance of the options was deemed to be exempt from registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
On March 5, 2003, the Company agreed to grant to the Mayo Foundation
for Medical Education and Research ("Mayo") warrants to purchase up to 100,000
shares and 50,000 shares, respectively, of common stock of the Company at an
exercise price of $1.75 per share. The warrants were issued on July 1, 2003. The
warrants were subject to the following conditions. The warrants to purchase up
to 100,000 shares become exercisable in four equal annual installments on July 1
of each year beginning July 1, 2004 as long as the Oaktree subsidiary and Mayo
continue to be parties to a certain Master Services Agreement effective November
15, 2002 (the "Master Services Agreement") and expire June 30, 2008. Each annual
installment becomes exercisable only if subscriptions to any consumer health
information publication intended for sale to the general public produced by Mayo
("Consumer Health Subscription Business") that are managed and fulfilled by
Oaktree under the Master Services Agreement account for at least ninety percent
of Mayo's total gross revenues derived from the Consumer Health Subscription
Business during the twelve-month period preceding the applicable installment
date. The warrants to purchase up to 50,000 shares become exercisable subject to
the achievement of certain revenue goals by Oaktree from New Business (as
defined in the warrants) and expire December 31, 2007. The warrants become
exercisable as to fifty percent of the shares if cumulative gross revenues from
New Business for the first time exceed $1,000,000 for any calendar year
commencing January 1, 2003 and ending December 31, 2006. The warrants become
exercisable as to one hundred percent of the shares if cumulative gross revenues
from New Business exceed $2,000,000 for any calendar year commencing January 1,
2003 and ending December 31, 2006, regardless of whether any portion of the
warrants was exercisable prior thereto. The issuance of the warrants described
in this paragraph was deemed to be exempt from registration under the Securities
Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
10.1 Warrant issued to Mayo Foundation for Medical Education and
Research to purchase 100,000 shares of common stock of the
Company effective March 5, 2003.
10.2 Warrant issued to Mayo Foundation for Medical Education and
Research to purchase 50,000 shares of common stock of the
Company effective March 5, 2003.
99.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*
99.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*
99.3 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.**
99.4 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.**
* Filed as an exhibit pursuant to Item 601(b)31 of Regulation
S-B as directed by the Securities and Exchange Commission in
Release No. 33-8238.
** Filed as an exhibit pursuant to Item 601(b)32 of Regulation
S-B as directed by the Securities and Exchange Commission in
Release No. 33-8238.
(b) REPORTS ON FORM 8-K
None
17
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
-------------------
Maritza Ramirez, Chief Financial Officer
and duly authorized signatory
Date: July 31, 2003
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